Fundamental Forecast for the US Dollar: Neutral

The US Dollar is starting 2018 much as it did the previous year, with a long losing streak. The greenback has now fallen for five consecutive weeks against its major counterparts. Interestingly, this is happening even as Fed rate hike bets continue to swell.

Indeed, the priced-in tightening path implied in Fed Funds futures has steadily steepened since September. It now points to a cumulative 60 basis point gain in the next 12 months. That's two rate hikes, and maybe a third. Investors put the probability that the first of these happens at the March FOMC meeting at 88.2 percent.

That puts the markets' outlook and that of Fed policymakers broadly in line. Furthermore, central bank officials seemingly never miss an opportunity to stress that they favor slow and cautious stimulus withdrawal, hinting that a change in this status quo position is unlikely.

Against this backdrop, the greenback's losses seem to reflect external factors, with capital flows chasing opportunities to get in early as other top central banks begin to dial back accommodation. The rush to capture would-be policy pivots from the BOJ and the ECB was clearly on display last week.

This means that the currency's path next week will probably reflect developing yield prospects outside of the US. A slowdown in UK CPI may be helpful in that it keeps the BOE on the sidelines but a cheery tone from the BOC and a strong Australian jobs report that shifts up RBA rate hike bets may trigger selling.