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USD To Consolidate Ahead Of EU Summit, Aussie To Face 3Q CPI

USD To Consolidate Ahead Of EU Summit, Aussie To Face 3Q CPI

2011-10-24 15:56:00
David Song, Currency Strategist
Share:

DJ FXCM Dollar Index

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

9607.88

9672.36

9603.46

-0.40

77.31%

USD_To_Consolidate_Ahead_Of_EU_Summit_Aussie_To_Face_3Q_CPI_body_ScreenShot056.png, USD To Consolidate Ahead Of EU Summit, Aussie To Face 3Q CPI

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.40 percent lower on the day after moving 77 percent of its average true range, and the reverse currency may continue to trade heavy over the next 24-hours of trading as market participants diversify away from the greenback. As the USD carves out a near-term top around 9,800, we may see the gauge continue to give back the advance from 9,395, and hopes surrounding the EU Summit scheduled for later this week may keep investor confidence afloat as European policy makers try to come up with a resolution to once and for all address the risk for contagion. However, we may see a short-term correction should the relative strength index continue to hold above 30, and the major currencies may consolidate throughout the beginning of the week as the meeting on Wednesday comes into focus.

USD_To_Consolidate_Ahead_Of_EU_Summit_Aussie_To_Face_3Q_CPI_body_ScreenShot057.png, USD To Consolidate Ahead Of EU Summit, Aussie To Face 3Q CPI

As the reversal from the monthly high (10,134) gathers pace, we may see the index come up against the 23.6% Fibonacci retracement around 9,560, and the developments coming out of the euro-area are likely to heavily influence the currency market as European officials make a greater effort to put their differences aside. However, we may see the EU struggle to meet on common ground as the heightening risk for contagion calls for further assistance, and the group make an attempt to buy more time as European policy makers continue to seek help from international community. In turn, hopes of coming up with a quick fix would falter, and we may see a marked shift in risk sentiment as the fundamental outlook for Europe deteriorate.

USD_To_Consolidate_Ahead_Of_EU_Summit_Aussie_To_Face_3Q_CPI_body_ScreenShot058.png, USD To Consolidate Ahead Of EU Summit, Aussie To Face 3Q CPI

All four components continued to gained ground against the greenback on Monday, led by a 0.77 percent advance in the Australian dollar, and the high-yielding currency may appreciate further over the next 24-hours of trading as it benefits from the rise in risk appetite. As the AUD/USD pushes back above the 200-Day SMA at 1.0389, it seems as though we will see the aussie-dollar continue to retrace the decline from the previous month, but the fundamental developments coming out of the isle-nation may weigh on the exchange rate as the economic docket is expected to cast a weakened outlook for inflation. Consumer prices in Australia is expected to increase at an annual pace of 3.5% in the third quarter after expanding 3.6% during the previous period, and the slowdown in price growth may spark a bearish reaction in the local currency as the easing risk for inflation heightens the scope for a rate cut. According to Credit Suisse overnight index swaps, market participants still see the Reserve Bank of Australia lowering the benchmark interest rate by more than 100bp over the next 12-months, and expectations for lower borrowing costs may gather pace over the near-term as the region faces a slowing recovery. In turn, the recent rally in the AUD/USD may be cut short, and a soft CPI report may lead the pair to give back the advance carried over from the previous week as interest rate expectations wane.

--- 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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