USD To Consolidate Ahead Of NFPs, Euro Continues To Find Resistance

DJ FXCM Dollar Index

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 1.01 percent lower from the open after moving 212 percent of its average true range, and the rebound from 9,799 should gather pace as the 30-minute relative strength index bounces back from a low of 16. In turn, the greenback may work its way back into the downward trending channel from earlier this week, but we may see the lower bound act as trendline resistance as the index struggles to push back above 9,850. Should the rise in risk sentiment carry into the end of the week, the recent weakness in the USD could instill a bearish outlook for December, and market participants may continue to move away from the reserve currency as global policy makers step up their efforts to address the ongoing turmoil in the world financial system.

As the dollar breaks out of the upward trending channel from earlier this month, we may see the USD consolidate further over the near-term, but we may see the greenback come under increased pressure as it appears to have carved out a double-top in November. Should the bearish pattern pan out in the days ahead, we may see the index fall back towards the 38.2 percent Fibonacci retracement around 9,708 to test for near-term support, but we may see a similar decline like the one in October as market sentiment firms up. Nevertheless, with U.S. Non-Farm Payrolls on tap for later this week, we may see an above-forecast print following the much better-than-expected ADP Employment report, and a marked improvement in the labor market could fuel the rise in risk-taking behavior as the development instills an improved outlook for future growth. As the economic recovery gradually gathers pace, the rise in private sector activity will limit the Fed’s scope to expand monetary policy further, and we may see the FOMC bring its easing cycle to an end as the U.S. avoids a double-dip recession.

All four components advanced against the greenback once again, led by a 2.54 percent surge in the Australian dollar, which was following by a 0.88 gain in the Euro. Although the EUR/USD rallied all the way up to 1.3532, we saw another failed run at the 20-Day SMA (1.3534), and the single currency looks poised to consolidate over the next 24-hours of trading as optimism surrounding the EU meeting tapers off. Indeed, the group of finance ministers refrained from announcing any details on leveraging the European Financial Stability Facility, and we may see the EU make a push to buy more time ahead of the summit scheduled for December 9 in Brussels. Beyond the meeting, market participants see an increased risk of seeing a rate cut next month as the euro-area prepares for a ‘mild recession,’ and the near-term outlook for the single currency remains bearish as interest rate expectations falter. According to Credit Suisse overnight index swaps, investors are now pricing a 91% chance for a 25bp rate cut at the next meeting on December 8, but market participants see the Governing Council implementing more nonstandard measures as the governments operating under the fixed-exchange rate system become increasingly reliance on monetary stimulus. In turn, the near-term rally in the EUR/USD could be short-lived, and the exchange rate may threaten the rebound from 1.3145 as the pair appears to be trading within a downward trending channel.

--- Written by David Song, Currency Analyst To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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