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USD Index Continues To March Towards 9800, Australian Dollar Trades Within Descending Triangle

USD Index Continues To March Towards 9800, Australian Dollar Trades Within Descending Triangle

2011-05-23 16:06:00
David Song, Currency Strategist
Share:

DJ FXCM Dollar Index

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

9748.89

9757.24

9668.56

1.00

107.06%

USD_Index_Continues_To_March_Towards_9800_Australian_Dollar_Trades_Within_Descending_Triangle_body_ScreenShot028.png, USD Index Continues To March Towards 9800, Australian Dollar Trades Within Descending Triangle

The U.S. dollar advanced across the board on Monday and the near-term rally in the greenback should gather pace as currency traders scale back their appetite for yields. The Dow Jones-FXCM U.S. dollar index is 1.00% higher on the day after moving 107% of its average true range, and the gauge should continue to march towards 9800.00 as there appears to be a major shift in risk-taking behavior. However, as the 30-minute relative strength index falls back from overbought territory, there could be a small correction over the next 24-hours of trading, and the index may fall back towards 9700.00 before it continues to push higher.

As the Federal Reserve plans to conclude QE2 in June, investors across the financial markets appear to be heavily scaling back their appetite for yields, and risk aversion could turn into the major theme going into the second-half of the year. At the same time, heightening fears surrounding the European debt crisis should continue to spur demands for the USD, and the single-currency is likely to weaken further over the near-term as Greece faces a risk of failing to meet its debt obligations. As European policy makers struggle to restore investor confidence, the near-term decline in the EUR/USD should gather pace, and there’s certainly little in the way of seeing a major rebound in the euro-dollar as the carves out a head-and-shoulders top in May.

USD_Index_Continues_To_March_Towards_9800_Australian_Dollar_Trades_Within_Descending_Triangle_body_ScreenShot027.png, USD Index Continues To March Towards 9800, Australian Dollar Trades Within Descending Triangle

All four components weakened on Monday, led by a 1.54% decline in the Australian dollar, and the high-yielding currency looks poised for a sharp decline in the coming days as it traders within a descending triangle. As price action approaches the apex, we should see a bearish breakout in the AUD/USD, and a decline below the 23.6% Fibonacci retracement from the 2010 low to the 2011 high (1.0320-50) should expose the 38.2% Fib, which lies around 0.9890-0.9900. As the Reserve Bank of Australia looks to carry its wait-and-see approach into the second-half of 2011, interest rate expectations are likely to come under pressure, and central Bank Governor Glenn Stevens may preserve a neutral stance in the third-quarter as price pressures dissipate. In turn, the AUD/USD presents a good near-term setup for currency traders, and there’s certainly a lot of room to the downside as risk sentiment falters.

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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