USD Index Carves Out Higher Low, Sterling Approaching Resistance

DJ FXCM Dollar Index

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) remains 0.54 percent higher from the open after moving 122 percent of its average true range, and the greenback should appreciate further over the near-term as it breaks out of the downward trending channel from earlier this month. In turn, the rebound from 9,837 may turn into a larger correction, but the USD may consolidate ahead of the Federal Open Market Committee interest rate decision as the 30-minute relative strength index falls back from a high of 69. Given the new composition of the FOMC, with central bank doves Sandra Pianalto, Dennis Lockhart, and John Williams joining the committee, we may see the Fed talk up speculation for additional monetary support, but the rate decision could yield a bullish dollar reaction should the group raise its fundamental assessment for the world’s largest economy.

As the USD finds support around the 61.8 percent Fib (9,830), the series of higher lows reinforce a bullish outlook for the greenback, and the reserve currency remains primed to mark a higher high as we expect the FOMC to soften its dovish tone for monetary policy. Although the Fed is widely expected to maintain its current policy in January, the more robust recovery certainly limits the central banks scope to push through another large-scale asset purchase program, and we may see Chairman Ben Bernanke endorse a wait-and-see approach for 2012 as the risk of a double-dip recession subside. As the central bank is set to publish its interest rate forecast for the first time in history, the move for greater transparency could spark whipsaw-like price action across the major currencies, but the press conference with Chairman Bernanke could fuel a bullish reaction in the USD as long as the central bank head highlights an improved outlook for the world’s largest economy.

The greenback advanced against most of its major counterparts amid the flight to safety, while the British Pound maintained the overnight advance against the dollar as the U.K. government takes extraordinary steps to balance public finances. As Britain remains ahead of the curve in addressing the budget deficit, market participants are beginning to treat U.K. assets as a safe-haven, and this development is likely to be a major theme in 2012 as the Bank of England is anticipated to maintain the record-low interest rate for a prolonged period of time. However, as the U.K. teeters on the brink of a double-dip recession, the BoE Meeting Minutes due out later this week could heighten expectations for more quantitative easing, and the statement could spark a sharp reversal in the GBP/USD as the pair remain capped by the 38.2 percent Fib from the 2009 low to high around 1.5680-1.5700. Should the MPC show an increased willingness to expand the Asset Purchase Facility beyond the GBP 275B target, we expect to see the pound-dollar give back the advance from earlier this month, and the pair should come up against the 50.0 percent Fib around 1.5270-1.5300 to test for near-term support.

--- Written by David Song, Currency Analyst

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