US Dollar Exchange Rate Complex Forecast to Rally at BMO Capital Markets

The view has largely been proven to be incorrect with the pound sterling to dollar exchange rate (GBP/USD) reaching the best levels since 2008 in the summer months on the back of acombination of GBP strength and USD weakness.

The euro to dollar exchange rate (EUR/USD) meanwhile enjoyed a rally for much of the year which allowed currency buyers to transact at the best rate of exchange since 2011. But is all this about to change in a swing of positive fortune for the USD?

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What does the history of exchange rates tell us?

According to Greg Anderson, Global Head of FX Strategy at BMO Capital Markets, we should be preparing for a return to strength for the US dollar.

In a quarterly exchange rate forecast note concerning the dollar, Anderson unveils a concise set of guidance for those with an eye on the currency markets in coming months:

"If we have learned anything from the history of exchange rates, it is that they can only suppress volatility for so long.

"Although they go through periods of low volatility (especially during the summer), exchange rates eventually break out and attract the market participation that causes them to overshoot.

"Such bursts of volatility occasionally occur even when underlying fundamentals are static and they are almost guaranteed to occur when the fundamental outlook changes in a major way.

"With that in mind, although we would admittedly not look for much FX volatility in the remainder of July or in August, we see a substantial risk that volatility makes a major comeback in September and beyond.

"At that point the focus of forward-looking markets will turn to 2015.

"By the end of October, all of the liquidity from QE3 will be gone and the market will understand better that the ECB’s TLTROs will not be a full replacement of that liquidity.

"Volatility should come back and in general we would expect it to favour the USD as the market continue to shift between long-USD and neutral positions.

"So even if Q3 is sleepy, it is the time to position for an eventual USD rally along with a normalisation of FX volatility."

A good week passes by for the dollar

Dollar strength has been a theme of recent trading sessions "buoyed more by positive long-term sentiment than physical data," says Carl Hasty at Smart Currency Business.

The currency enjoyed gains against the majority of its trading partners, apart from an exceptionally strong sterling. The main event of interest to investors stemmed from words from US Federal Reserve Chair Janet Yellen.

In her testimony to the Senate Banking Committee, she stated that interest rates could rise sooner than expected should the labour market continue to show improvements. On top of this, she alluded to the fact that when they do start to rise, it could happen quickly.

"With regards to data, the market seemed to ignore the release of worse-than-expected retail sales figures and instead focused on better than expected manufacturing data. Wednesday also showed inflation data from the Producers’ Price Index at a much higher level than anticipated, showing further evidence of a stronger economy, a point backed up as the Beige Book which indicated all 12 Federal Reserve banks local economic are expanding," says Hasty.

Today closes out the week with a single release of interest, as the University of Michigan provides its consumer sentiment figure.

If you are looking to buy or sell US dollars, we suggest contacting your trader now for live rates, news and currency-purchasing strategies.