USD Graphic Rewind: Dollar Index Set to Test Internal Support at 77.50
The dollar index managed to close in higher ground yesterday but was some 50-points off its highs as the euro staged a intraday rebound to close only modestly lower. The index had been trading sharply higher, visible on left side of above chart, but comments from ECB Mersch inspired a large liquidation of positions and something of a reversal playing out. ECB Mersch said that the central bank may elect to toughen up its language on inflationary pressure as a result of potentially higher inflation imported by rising commodity and food prices. Mersch went on to add, crucially, that the ECB must be ready to act, ie raise rates, to combat rising inflation. The euro immediately pared a large part of its over-night declines resulting in the index dropping back ahead of the North American open.
The index traded mostly sideways through the rest of the day and failed to reassert itself despite US stocks racking up heavy losses driving bourses to their biggest one day loss so far in 2011. Over-night the index has touched new lows as rate hike speculation drives further gains in the euro. However, the index should remain underpinned by ongoing tensions in Libya and across the region with some news networks reporting protests have spread west to the Ivory Coast.
The index is once again finding support from the highlighted internal support level at 77.50 where previous congestion has taken place. Considering the current state of geopolitics we could well see the index stage a rebound off this level and move higher once again as investors seek safety. However, if the focus shifts off protests in the Middle East and North Africa and onto interest rate hike speculation we could see the index break below this support which opens a test of 2011 lows below 77.00.
Written by Jonathan Granby, DailyFX Research Team
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.