Dollar Approaches Key Trendline Support as Improving Sentiment Weighs

The greenback was weaker at the close of North American trade with the Dow Jones FXCM Dollar Index (Ticker: USDollar) off 0.42% on the session. Risk sentiment saw a significant pickup early in New York on strong earnings from the likes of IBM, Coca-Cola Co. and Novartis, with equities surging across the board. Stocks closed markedly higher with the Dow, the S&P 500, and the NASDAQ advancing 1.63%, 1.63%, and 2.22% respectively. The gains mark the largest single day advance in the Dow since December 1st as news that a bipartisan group of six senators had proposed a debt deal that would cut the US deficit by more than $4 trillion eased concerns of a possible US default. Markets extended the day’s gains after President Obama endorsed the deal that could finally put an end to the debate raging on Capitol Hill.

The dollar came under pressure as traders sought yields in the midst of surging risk appetite. A daily chart shows the index closing just below at the 23.6% Fibonacci retracement taken from the November decline at the lower bound trendline of the ascending channel dating back to April. A break below this long-term trendline support could see further weakness for the dollar in the days ahead.

An hourly chart sees the greenback once again breaking below a trendline support of the short-term ascending channel dating back to early June. Interim support for the dollar lies just lower at the 50% Fibonacci retracement taken from the May advance at 9550 with subsequent floors seen lower at 9525 and the 61.8% retracement at 9500. Topside resistance now stands at 9600 backed by 9630 and the 23.6% retracement at 9660.

The chart above shows the dollar sliding against all the component currencies save the yen which once again held a fairly tight range against the greenback. The losses are highlighted by at 1.19% slide against the aussie which moved more than 125% of its average daily true range. Boasting the highest interest rate out of the developed economies, the aussie’s advance comes as no surprise. However concerns that the Reserve Bank of Australia may have tightened to much too quickly has seen traders seemingly started to price in future rate cuts from the central bank, with Credit Suisse overnight swaps now expecting more than 50 basis points in cuts over the next twelve months. Accordingly the aussie’s rally may be short-lived. The sterling takes second place against the dollar today with a 0.40% advance. The sterling may also quickly pare gains with the BoE minutes on tap overnight. As noted in today’s scalping report the central bank may cite increasingly dovish remarks as policy makers struggle to keep the recovery on proper footing.

Expectations for tomorrow existing home sales report are high after today’s pending homes sales and building permits reports bested estimates. A strong read could see markets extend today’s rally although we note that the situation in Europe continues to loom despite today’s advance. EU officials will convene for a summit this week to discuss the ongoing crisis and how the region can prevent further contagion.

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Written by Michael Boutros, Currency Analyst for DailyFX.com

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