Strong US data

Strong US data now will lead to sharp dollar rallies

UBSNewForexforecasts

UBS - "The Federal Reserve is only likely to start raising interest rates next year. But this month's Open Market Committee meeting has primed the dollar for a major rally over the next few months. Policymakers agreed to taper monthly bond purchases by another $10bn. In addition, the Fed's forward guidance linking future interest rate hikes to a 6.5% unemployment rate was dropped. But the FOMC also surprised by retaining its bullish economic forecasts despite the winter slowdown in America, by marginally raising its rate hike forecasts for 2015 and 2016, and by Chairwoman Yellen suggesting the central bank may only wait around six months before considering interest rate rises after quantitative easing has finished.

The risk that the first Fed rate increase may be only one year away now will make currency markets particularly sensitive to a faster rebound in US data over the next couple of months. Already several releases suggest America's economy is picking up as the weather improves. One strong employment report now is likely to push the dollar sharply higher as investors would anticipate the Fed ending its current round of asset purchases well before the end of the year and potentially becoming the first major central bank to start raising interest rates early next year.

This week's key points for currencies are:

- strong US data now will lead to sharp dollar rallies

- advanced PMI, M3 data due in the Eurozone

- Japanese CPI key for yen in the week ahead

- falling UK inflation supports MPC doves, restrains Cable

- SNB forecasts suggest franc cap to stay for 2014 and 2015

- still too early to see a medium term AUDNZD base

- BoC Poloz keeps USDCAD a buy on dips"

by:Francesc Riverola