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USD Rally Threatened By Weak Employment, Euro Breakdown On Tap

USD Rally Threatened By Weak Employment, Euro Breakdown On Tap

2011-09-30 15:20:00
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

9973.25

9988.66

9904.95

0.56

92.77%

USD_Rally_Threatened_By_Weak_Employment_Euro_Breakdown_On_Tap_body_ScreenShot011.png, USD Rally Threatened By Weak Employment, Euro Breakdown On Tap

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.56% higher on the day after moving 93% of its average true range, and the gauge looks poised to trend higher in October as it maintains the upward trend from earlier this month. In turn, we should see the USD climb back above the 10,000 level and the greenback may continue to recoup the losses from earlier this year as market participants scale back their appetite for risk. However, we may see a near-term correction start to unfold heading into the weekend as the 30-minute relative index falls back from a high of 68, and the index may fall back towards the lower bounds of the Bollinger Band around 9923.

USD_Rally_Threatened_By_Weak_Employment_Euro_Breakdown_On_Tap_body_ScreenShot012.png, USD Rally Threatened By Weak Employment, Euro Breakdown On Tap

As the dollar index finds support around the 50.0% Fibonacci retracement around 9828, the recent rebound in the USD looks poised to gather pace, and the greenback may make a run at the 78.6% Fib around 10,117 as it benefits from safe-haven flows. However, we may see the reserve currency consolidate ahead of the highly anticipated U.S. Non-Farm Payrolls report on tap for the following week as it’s expected to a show a tepid recovery in the labor market, and a dismal employment report may sap demands for the dollar as the world’s largest economy faces an increased risk of a double-dip recession. In turn, the Federal Reserve may carry its easing cycle into the following year, and Chairman Ben Bernanke may keep the door open to conduct another round of quantitative easing in order to encourage a sustainable recovery.

USD_Rally_Threatened_By_Weak_Employment_Euro_Breakdown_On_Tap_body_ScreenShot013.png, USD Rally Threatened By Weak Employment, Euro Breakdown On Tap

All four components weakened against the USD on Friday, led by a 1.22% decline in the Euro, and the single-currency may face additional headwinds over the following week as market participants speculate the European Central Bank to scale back the rate hikes from earlier this year. According to Credit Suisse overnight index swaps, market participants are pricing a 100% chance for a 25bp rate cut at the policy meeting on October 6, and the Governing Council may take additional steps to stimulate the ailing economy as the sovereign debt crisis continues to bear down on the recovery. At the same time, the Governing Council may look to expand its nonstandard measures given the ongoing turmoil within the financial system, and the ECB may show an increased willingness to increase monetary support as the heightening risk for contagion dampens the outlook for the region. In turn, the EUR/USD may threaten the rebound from 1.3362, and the exchange rate may continue to selloff in the following month as European policy makers struggle to restore investor confidence.

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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