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U.S. Dollar Consolidation Ahead, Euro Rally Hinges On ECB

U.S. Dollar Consolidation Ahead, Euro Rally Hinges On ECB

2011-06-30 17:35:00
David Song, Currency Strategist
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DJ FXCM Dollar Index

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

9571.08

9593.53

9546.92

-0.32

64.27%

U.S._Dollar_Consolidation_Ahead_Euro_Rally_Hinges_On_ECB_body_ScreenShot014.png, U.S. Dollar Consolidation Ahead, Euro Rally Hinges On ECB

The Dow Jones-FXCM U.S. Dollar index (Ticker: USDollar) tumbled lower during the overnight trade, but the rebound from 9546.92 should gather pace going into the end of the week as risk appetite appears to be tapering off. The USD remains 0.16% lower from the open after moving 64% of its average true range, and the correction should gather pace over the next 24-hours of trading as the relative strength index bounces back from a low of 17. However, as the gauge breaks out of the upward trending channel from earlier this month, the greenback may consolidate heading into July, but the shift away from risk-taking behavior may gather pace over the near-term as the Fed prepares to withdraw the additional $600B in quantitative easing.

U.S._Dollar_Consolidation_Ahead_Euro_Rally_Hinges_On_ECB_body_ScreenShot013.png, U.S. Dollar Consolidation Ahead, Euro Rally Hinges On ECB

Indeed, the daily chart reinforces a bullish outlook for the USD as price action trades within an upward trending channel from the 2011 low (9337.19), and we should see higher prices in July as we expect the index to fill-in the gap from the previous day. As the rebound picks up, we should see the index make another run at 9800.00, and the greenback may continue to trend higher in the second-half of the year as the Fed draws up a conditional exit strategy to withdraw monetary stimulus.

U.S._Dollar_Consolidation_Ahead_Euro_Rally_Hinges_On_ECB_body_ScreenShot015.png, U.S. Dollar Consolidation Ahead, Euro Rally Hinges On ECB

All four components gained ground against the greenback for the second consecutive day, led by a 0.57% rally in the Euro, and the single-currency may continue to trend higher over the near-term as the European Central Bank is widely expected to raise the benchmark interest rate by another 25bp at the next policy meeting on July 7. However, as Euro-Zone faces a slowing recovery, ECB President Jean-Claude Trichet may soften his hawkish tone for inflation, and the central bank head may endorse a wait-and-see approach for the second-half of the year as the fundamental outlook remains clouded with high uncertainty. In turn, the relief rally in the EUR/USD may taper off in the days ahead, and the exchange rate may work its way back towards 1.4000 as it continues to trade within a descending triangle.

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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