USD Index Looks Higher Ahead Of FOMC Rate Decision, JPY Eyes June Low

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.12 percent higher from the open after moving 34 percent of its average true range, and we may see the greenback track higher over the next 24-hours of trading amid the bullish divergence in the 30-minute relative strength index. In turn, we anticipate to see a stronger dollar going into the FOMC interest rate decision, and the fresh batch of central bank rhetoric may reinforce our bullish outlook for the reserve currency should the central bank continue to soften its dovish tone for monetary policy. As the Fed continues to embark on ‘Operation Twist,’ there’s limited scope of seeing the central bank announcing another large-scale asset purchase program in August, and it seems as though the committee is slowly moving away from quantitative easing as the recovery gradually gathers pace.

The USDOLLAR is certainly at a critical juncture as it threatens the ascending channel from earlier this year, but we will maintain our bullish call for the greenback as the rebound in the relative strength index as it maintains the upward trend from the beginning of 2012. As the index holds above the 10,000 figure, we may see the dollar carve out a higher low going into August, and the FOMC rate decision may spark a sharp rally in the USD should the Fed continue to talk down expectations for QE3. Beyond the policy meeting, the highly anticipated U.S. Non-Farm Payrolls report is projected to show another 100K rise following the 80K expansion the month prior, while the jobless rate is anticipated to hold steady at 8.2% for third month in July. As the Fed anticipates to see a stronger recovery later this year, a slew of positive developments should pave the way for a larger move to the upside, and we may see the index make a run at the 100 percent Fibonacci retracement around 10,334 as market participants scale back expectations for QE3.

Two of the four components advanced against the greenback, led by a 0.18 percent rally in the Japanese Yen, and the low-yielding currency may continue to appreciate against its U.S. counterpart as the USDJPY maintains the downward trend from earlier this month continues to take shape. As the pair struggles to hold above the 10-Day SMA at 78.40, the pair looks poised to may another move below the 78.00 figure, and we may see the dollar-yen threaten the June low (77.65) as the Yen continues to benefit from positive real interest rates in Japan.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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