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USD Index Breaks Out Ahead Of China GDP, AUD To Falter On RBA Policy

USD Index Breaks Out Ahead Of China GDP, AUD To Falter On RBA Policy

David Song, Strategist





Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index






USD_Index_Breaks_Out_Ahead_Of_China_GDP_AUD_To_Falter_On_RBA_Policy_body_ScreenShot039.png, USD Index Breaks Out Ahead Of China GDP, AUD To Falter On RBA Policy

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.32 percent higher from the open after moving 98 percent of its average true range, and we will maintain a bullish outlook for the greenback as the inverse head-and-shoulders reversal takes shape. In light of the reversal pattern, we should see the short-term rebound pave the way for a move above the 10,300 figure, but we will keep a close eye on the 30-minute relative strength index as it remains in overbought territory. As a result, we may see a small pullback going into the end of the week, and we will look to buy dips in the dollar as it continues to benefit from safe-haven flows. At the same time, the bullish sentiment surrounding the reserve currency may pick up as the Federal Reserve appears to be moving away from quantitative easing, and we may see the FOMC continue to soften its dovish tone for monetary policy as the economy gets on a more sustainable path.

USD_Index_Breaks_Out_Ahead_Of_China_GDP_AUD_To_Falter_On_RBA_Policy_body_ScreenShot040.png, USD Index Breaks Out Ahead Of China GDP, AUD To Falter On RBA Policy

As the USDOLLAR breaks out of the range-bound price action range-bounce price action carried over from June, we should see the upward trend continue to take shape, and the flight to safety may gather pace on Friday should China’s 2Q GDP report fall short of market expectations. The world’s second-largest economy is expected to grow at the slowest pace since 2009, and the heightening risk for a ‘hard landing’ may continue to sap risk-taking behavior as the outlook for global growth deteriorates. At the same time, the U. of Michigan Confidence report for July is expected to show a rebound in household sentiment as market participants see the index advancing to 73.5 from 73.2 in the previous month, and the data may increase the appeal of the dollar as in dampens speculation for QE3.

USD_Index_Breaks_Out_Ahead_Of_China_GDP_AUD_To_Falter_On_RBA_Policy_body_ScreenShot041.png, USD Index Breaks Out Ahead Of China GDP, AUD To Falter On RBA Policy

Three of the four components weakened against the greenback, led by a 1.11 percent decline in the Australian dollar, and the high-yielding currency may continue to give back the rebound from 0.9580 as it fails to maintain the upward trend from June. As the AUDUSD carves out a lower top just below the 23.6 percent Fibonacci retracement from the 2010 low to the 2011 high around 1.0360-70, the technical developments cast a very bearish forecast for the pair, and the aussie may face additional headwinds throughout the second-half of the year as the fundamental outlook for the $1T economy deteriorates. According to Credit Suisse overnight index swaps, market participants now see the Reserve Bank of Australia cutting the benchmark interest rate by more than 100bp over the next 12-months, and the shift in the policy outlook should drag the AUDUSD lower as interest rate expectations falter.

--- Written by David Song, Currency Analyst

To contact David, e-mail Follow me on Twitter at @DavidJSong

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