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USD To Consolidate Ahead Of FOMC Minutes, Sterling To Hold Flat

USD To Consolidate Ahead Of FOMC Minutes, Sterling To Hold Flat

2011-10-11 15:50:00
David Song, Currency Strategist
Share:

DJ FXCM Dollar Index

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

9870.17

9891.36

9842.16

0.26

54.49%

USD_To_Consolidate_Ahead_Of_FOMC_Minutes_Sterling_To_Hold_Flat_body_ScreenShot012.png, USD To Consolidate Ahead Of FOMC Minutes, Sterling To Hold Flat

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.26% higher on the day after moving 55% of its average true range, and the greenback may continue to recoup the losses from earlier this month should the flight to safety gather pace. As the economic docket remains fairly light for the rest of the day, we should see risk trends continue to dictate price action for the major currencies, and the rebound in the USD may gather pace over the next 24-hours of trading as the uncertainties surrounding the global economy bears down on investor confidence. However, the greenback may consolidate ahead of the Fed meeting minutes as market participants weigh the outlook for monetary policy, and comments from the central bank is likely to heavily influence the USD as Chairman Ben Bernanke maintains a cautious outlook for the world’s largest economy.

USD_To_Consolidate_Ahead_Of_FOMC_Minutes_Sterling_To_Hold_Flat_body_ScreenShot013.png, USD To Consolidate Ahead Of FOMC Minutes, Sterling To Hold Flat

As the dollar holds support around the 50.0% Fibonacci retracement (9,828), we may see the gauge work its way back towards the 61.8% Fib around 9,947, but dovish comments from the Fed is likely to dampen the appeal of the greenback as market participants still see a chance for another round of quantitative easing. As the world’s largest economy faces a slowing recovery, the FOMC is widely expected to carry its easing cycle into the following year, and the central bank may see an increased argument to conduct QE3 as growth and inflation falter. However, there could be a growing rift within the FOMC as policy makers expect economic activity to gather pace in the coming months, and Chairman Ben Bernanke may talk up speculation for additional monetary support in order to encourage a sustainable recovery. In turn, the rebound in the USD may be short-lived, and the greenback may continue to consolidate over the near-term as investors weigh the prospects for future policy.

USD_To_Consolidate_Ahead_Of_FOMC_Minutes_Sterling_To_Hold_Flat_body_ScreenShot014.png, USD To Consolidate Ahead Of FOMC Minutes, Sterling To Hold Flat

All four components weakened against the USD on Tuesday, led by a 0.43% decline in the Australian dollar, which was followed by a 0.41% drop in the British Pound. As the GBP/USD carves out a near-term top around 1.5700, the exchange rate may continue to retrace the rebound from 1.5273, but we may see the pair trend sideways over the coming days as the Bank of England is scheduled to release its policy meeting minutes next week. In light of the recent developments coming out of the U.K., the BoE is widely expected to maintain a cautious outlook for the region, and the central bank may keep the door open to expand monetary policy further even after increasing its asset purchase program to GBP 275B. As the BoE sees an increased risk of undershooting the 2% target for inflation, the central bank may continue to step up its efforts to stimulate the ailing economy, and speculation for additional monetary support is likely to weigh on the exchange rate as interest rate expectations falter.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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