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USD Rebound To Gather Pace, Sterling Outlook Remains Bearish

USD Rebound To Gather Pace, Sterling Outlook Remains Bearish

2011-10-19 15:40:00
David Song, Currency Strategist
Share:

DJ FXCM Dollar Index

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

9726.60

9766.21

9694.59

-0.25

79.16%

USD_Rebound_To_Gather_Pace_Sterling_Outlook_Remains_Bearish_body_ScreenShot035.png, USD Rebound To Gather Pace, Sterling Outlook Remains Bearish

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) remains 0.25 percent lower from the open after moving 79 percent of its average true range, and the greenback may continue to retrace the overnight decline to 9,693 as the 30-minute relative strength index bounces back from a low of 29. As the dollar index breaks out of the downward trending channel from earlier this month, we may see the greenback consolidate over the remainder of the week, and the gauge may work its way back towards 9,800 as it pares the decline from the beginning of the week. However, dovish comments coming out of the Federal Reserve may weigh on the exchange rate, and the reserve currency may face additional headwinds over the near-term as the central bank keeps the door open to conduct another round of quantitative easing.

USD_Rebound_To_Gather_Pace_Sterling_Outlook_Remains_Bearish_body_ScreenShot036.png, USD Rebound To Gather Pace, Sterling Outlook Remains Bearish

Indeed, the USD appears to be carving a bottom this week as it continues to find support around the 38.2 percent Fibonacci retracement (9,708), and we may see the greenback continue to recoup the losses from earlier this month as market sentiment appears to be turning over. As heightening uncertainties surrounding the global economy bears down on investor confidence, we may see another flight to safety emerge over the coming days, and the dollar index may resume the rebound from 9,395 as market participants scale back their appetite for yields. However, the Fed’s Beige Book may dampen the appeal of the reserve currency as we expect the central bank to maintain a cautious outlook for the world’s largest economy, and the survey may highlight an increased willingness to expand monetary policy further as the region faces a slowing recovery. In turn, we are likely to see the FOMC carry its easing cycle into the following year, and the committee may implement a range of policy tools to stimulate the ailing economy in an effort to mitigate the risk of a double-dip recession.

USD_Rebound_To_Gather_Pace_Sterling_Outlook_Remains_Bearish_body_ScreenShot037.png, USD Rebound To Gather Pace, Sterling Outlook Remains Bearish

All four components advanced against the greenback on Wednesday, led by a 0.62 percent advance in the British Pound, but the recent strength in the sterling may be short-lived as the Bank of England maintains a dovish outlook for monetary policy. As the BoE votes unanimously to expand its asset purchase program to GBP 275B, increased concerns of undershooting the 2 percent target for inflation may encourage the MPC to ease policy further, and the central bank may keep the door open to conduct more QE as the board maintains its dual mandate to ensure price stability while fostering full-employment. Expectations for additional monetary stimulus continues to instill a bearish outlook for the sterling, and the GBP/USD may threaten the rebound from 1.5273 as the fundamental outlook for the U.K. deteriorates.

--- 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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