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USD Remains Overbought, JPY At Risk As Intervention Threats Resurface

USD Remains Overbought, JPY At Risk As Intervention Threats Resurface

David Song, Strategist

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

10098.47

10141.6

10088.66

-0.21

117.63%

USD_Remains_Overbought_JPY_At_Risk_As_Intervention_Threats_Resurface_body_ScreenShot065.png, USD Remains Overbought, JPY At Risk As Intervention Threats Resurface

Although the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) remains 0.24 percent lower from the open, we’re maintaining our bullish outlook for the greenback as it maintains the upward trending channel from earlier this month. As the 30-minute relative strength index holds above oversold territory, we should see the index consolidate going into the end of the week, and the ongoing turmoil in Europe should continue to prop up the reserve currency in light of the headline-driven market. As the economic docket remains fairly light for the remainder of the week, shifts in risk sentiment should continue to influence the currency market, and the flight to safety may gather pace in the coming days as European policy makers struggle to restore investor confidence. In turn, we are looking for fresh 2012 highs going into the last full week of May, but the dovish tone held by the Federal Reserve may dampen the appeal of the greenback as market participants continue to look for another round of quantitative easing.

USD_Remains_Overbought_JPY_At_Risk_As_Intervention_Threats_Resurface_body_ScreenShot066.png, USD Remains Overbought, JPY At Risk As Intervention Threats Resurface

In light of the muted reaction to the FOMC Minutes, growing disparity within the committee appears to be dampening expectations for QE3, and we may see Fed officials continue to paint a mixed outlook for the world’s largest economy as the debt crisis continues to pose a threat to the global financial system. Although the FOMC kept the door open to expand monetary policy further, it seems as though the committee is will continue to soften its dovish tone for monetary as the economy gets on a more sustainable path. At the same time, the Fedappears to be taking note of the stickiness in underling price growth as some members saw a greater risk for inflation, and it seems as though the committee will slowly moving away from its easing cycle as the economic recovery gradually gathers pace. As the upward trend in the USDOLLAR and the relative strength index continues to take shape, the greenback looks poised for fresh yearly highs in the week ahead, but we will keep a close eye on the 78.6 percent Fibonacci retracement around 10,118 as it struggles to hold above the key figure.

USD_Remains_Overbought_JPY_At_Risk_As_Intervention_Threats_Resurface_body_ScreenShot013.png, USD Remains Overbought, JPY At Risk As Intervention Threats Resurface

The greenback weakened against two of the four components, led by a 1.36 percent rally in the Japanese Yen, and the low-yielding currency may continue to appreciate against its U.S. counterpart as Japan retains a positive real interest rate. As the downward trending channel in the USDJPY continues to pan out, we may see the pair fall back towards the 200-Day SMA at 78.46, but we will be keeping a close eye on the relative strength index as it approaches oversold territory. Nevertheless, in light of the recent appreciation in the Yen, policy makers in Japan may put increased pressure on the Bank of Japan to expand monetary policy further, and renewed speculation for a currency intervention may start to dampen the appeal of the low-yielding currency as the central bank looks to carry its easing cycle into the following year.

--- 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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