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U.S. Dollar Rebound To Gather Pace, British Pound At Risk

By , Currency Analyst
13 June 2011 19:05 GMT

DJ FXCM Dollar Index

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

9548.85

9628.12

9543.43

-0.67

118.68%

U.S._Dollar_Rebound_To_Gather_Pace_British_Pound_At_Risk_body_ScreenShot050.png, U.S. Dollar Rebound To Gather Pace, British Pound At Risk

The Dow Jones-FXCM U.S. dollar index pared the advanced from the previous week, but the rebound from 9452.35 should gather pace as there appears to be a major shift in risk-taking behavior. The USD is 0.67% lower from the open after moving nearly 119% of its average true range, and we should the near-term correction gather pace once the relative strength index bounces back from oversold territory. In turn, the reserve currency may regain its footing during the overnight trade, and the index may continue to retrace the decline from the May high (9764.97) as currency traders scale back their appetite for yields.

As the Fed plans to remove the additional $600B in quantitative easing , talks of an exit strategy are likely to surface in the second-half of the year, and risk aversion could become the dominant theme across the financial markets as the central bank begins to drain liquidity from the system. As the FOMC starts to unwind its emergency measures, the central bank may see scope to start normalizing monetary policy towards the end of 2011, but Fed Chairman Ben Bernanke may continue to endorse a zero interest rate policy at the next rate decision on June 22 given the slowdown in the economic recovery. Dovish remarks from the central bank head is likely to sap demands for the USD, but the near-term rebound in the greenback may gather pace going forward should the committee show an increased willingness to restore its balance sheet and lift borrowing costs off of the record-low.

U.S._Dollar_Rebound_To_Gather_Pace_British_Pound_At_Risk_body_ScreenShot051.png, U.S. Dollar Rebound To Gather Pace, British Pound At Risk

All four components advanced against the USD on Monday, led by a 0.92% rally in the British Pound, but the sterling may struggle to hold its ground during the overnight trade as the U.K. consumer price report is expected to show the headline reading for inflation stay at an annualized 4.5% for the second month in May. The slowdown in growth and inflation certainly allows the Bank of England to retain its current policy stance for most of 2011, but the policy meeting minutes due out on June 22 could weigh on interest rate expectations should the MPC talk up the risk of seeing another expansion in quantitative easing. As the economic recovery in the U.K. cools, the central bank will certainly look to support the real economy in the third-quarter, but the committee may step up its efforts to stem the downside risks for the region as it aims to encourage a sustainable recovery.

Join us to discuss the outlook for the major currencies on the DailyFXForums

To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

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13 June 2011 19:05 GMT