2013-06-17 04:25 GMT

Dollar Outlook Next Week Hinges on Bernanke

The month of June has proven to be an extremely volatile period in the forex market as the U.S. dollar fell aggressively against many major currencies. Unfortunately we can't expect the markets to calm anytime soon with a heavy dose of economic data expected from countries around the world. The U.K. and Australia will release monetary policy minutes, the Swiss National Bank will hold a monetary policy meeting and of course - we also have the Federal Reserve's monetary policy announcement on the calendar. In addition to these event risks, Eurozone PMIs, New Zealand GDP, UK retail sales, US manufacturing data and Canadian retail sales are also scheduled for release. Yet there's no question that of all these events, the most important will be the Fed meeting. Much of the volatility in the financial markets has been caused by the uncertainty of Fed policy. There's been a lot of talk about tapering asset purchases, which has caused stocks to weaken but at the same time, central bank officials and noted Fed watchers have stressed that a reduction in Quantitative Easing does not equate to tightening. They are absolutely right and we think that the rest of the market is beginning to realize this connection as well but based on the reaction to Jon Hilsenrath's article this week, there are still a subset who need convincing.

The outlook for the dollar this week will largely hinge on what Bernanke says at his post monetary policy meeting press conference. The central bank is not expected to alter its Quantitative Easing program but they will release their latest economic projections and provide clarity on their future intentions. We will be talking about the Fed all next week but in a nutshell with U.S. bond yields on the rise, we expect Bernanke to stress the different conditions needed for tapering vs. a rate hike. He will remind everyone that even if they decide to taper in a few months (a benchmark many Fed Presidents have used), they are still a long way from tightening monetary policy and the outlook for the greenback will depend how much this point is stressed. As for their forecasts, there's a mild chance that the Fed could downgrade its GDP estimates.-FXstreet.com

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