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USD May Threaten Trend Ahead Of FOMC, GBP To Hold Range On BoE Policy

USD May Threaten Trend Ahead Of FOMC, GBP To Hold Range On BoE Policy

2012-07-26 15:00:00
David Song, Strategist





Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index






USD_May_Threaten_Trend_Ahead_Of_FOMC_GBP_To_Hold_Range_On_BoE_Policy_body_ScreenShot097.png, USD May Threaten Trend Ahead Of FOMC, GBP To Hold Range On BoE Policy

Although the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.77 percent lower from the open, the greenback remains poised for a short-term correction as the 30-minute relative strength index bounces back from a low of 15. As the index maintains the range-bounce price action carried over from the previous month, we should see the greenback recoup the losses from earlier this week, but the reserve currency may struggle to hold its ground over the next 24-hours of trading as the economic docket is expected to show a slowing recovery in the U.S. Indeed, the advance GDP report is expected to show the growth rate increasing 1.4% in the second quarter after expanding 1.9% during the first three-month of 2012, and a dismal development may trigger a sharp selloff in the index as it fuels expectations for another large-scale asset purchase program.

USD_May_Threaten_Trend_Ahead_Of_FOMC_GBP_To_Hold_Range_On_BoE_Policy_body_ScreenShot098.png, USD May Threaten Trend Ahead Of FOMC, GBP To Hold Range On BoE Policy

We’re closely watching the June low (10,025) as the dollar threatens the range-bounce price action carried over from the previous month, but we will maintain our bullish forecast for the USDOLLAR as the relative strength index maintains the upward trend from earlier this year. However, we may see the index threaten the upward trending channel from January as market sentiment picks up, and a break and close below the 10,000 figure would lead us to scale back our bullish forecast for the reserve currency as it fails to maintain the series of higher highs paired with higher lows. Nevertheless, we may see the dollar maintain the range going into the FOMC interest rate decision as market participants weigh the outlook for monetary policy, and the fresh batch of central bank rhetoric may prop up the USD as the committee appears to be moving away from quantitative easing. As the Fed anticipates to see a more robust recovery over the coming months, we should see the central bank maintain its current policy over the remainder of the year, and the policy outlook continues to reinforce a bullish outlook for the greenback as the FOMC appears to be nearing the end of its easing cycle.

USD_May_Threaten_Trend_Ahead_Of_FOMC_GBP_To_Hold_Range_On_BoE_Policy_body_ScreenShot099.png, USD May Threaten Trend Ahead Of FOMC, GBP To Hold Range On BoE Policy

The greenback weakened against three of the four components, led by a 1.29 percent advance in the British Pound, but we should see the GBPUSD maintain the range-bounce price action ahead of the Bank of England interest rate decision on tap for next week as the pair remains capped by the 200-Day SMA (1.5742). In turn, we should see a pullback in the exchange rate, but the BoE meeting may fail to generate a clearer directional bias for the GBPUSD should the Monetary Policy Committee refrain from releasing a policy statement. Although the BoE is scheduled to release its meeting minutes on August 15, the quarterly inflation report coming out on the 8th may take some of the steam out of the policy statement, and we will be closely watching the updated forecast for growth and inflation as the central bank keeps the door open to expand monetary policy further.

--- 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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