The dollar continued to drift ahead of Wednesday’s Fed interest rate decision where the central bank will embark on a new medium of communication with financial markets. Early in the session, the greenback saw some brief support as traders shed dollar short positions and commodities weakened. A weaker than expected print on March home sales also dented risk appetite, providing some lift for the battered dollar. However, the gains were short lived as the greenback continued to drift lower throughout North American trade.
With Wednesday’s Fed interest rate decision looming, the dollar index continued to trade just above the multi-year lows seen last week at 73.73. Price volatility remained subdued today with most European markets closed in observance of Easter. Interim support for the greenback rests at 73.80, with a break targeting the 100% Fibonacci extension taken from the 2009 and 2010 crests at 73.32. Topside resistance is eyed at 74.30 backed by 74.70 and the 75-figure.
Traders will be lending a keen ear to Fed Chairman Bernanke’s comments on Wednesday when the central bank will hold its first ever post meeting press conference. The rate decision will mirror the ECB’s mode of delivery with a press conference aimed at providing increased transparency for financial markets. While the Fed is widely expected to leave rates unchanged, traders will be looking for clues as to the central bank’s timing with regards to the completion of QE2 as well as interest rate expectations. If Bernanke cites increasingly hawkish remarks, the dollar would undoubtedly see a relief rally as traders begin to factor in future rate hikes. As it stands, traders perceive a zero percent chance of a rate hike on Wednesday, with markets pricing in a hike of 36 basis points for the next twelve months.
Aside from Wednesday’s domestic calendar, the dollar remains vulnerable to economic data out of Europe with the EU 2010 government debt-to-GDP ratio release tomorrow. The report could highlight further weakness in the periphery nations, bringing the sovereign debt crisis back into focus. Event risk for the dollar continues to mount on Wednesday morning when the UK reports on Q1 GDP figures. A stronger than expected print would put pressure on the MPC to move on rates sooner than anticipated, adding further downside for the dollar.
Written by Michael Boutros, Currency Analyst for DailyFX.com
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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