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USD Maintains Bullish Trend, Rebound To Accelerate On Less Dovish Fed

USD Maintains Bullish Trend, Rebound To Accelerate On Less Dovish Fed

2012-08-22 14:45:00
David Song, Strategist
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Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

10015.36

10037.18

10009.84

0.03

56.69%

USD_Maintains_Bullish_Trend_Rebound_To_Accelerate_On_Less_Dovish_Fed_body_ScreenShot112.png, USD Maintains Bullish Trend, Rebound To Accelerate On Less Dovish Fed

Although the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) remains little changed prior to the FOMC Minutes, we may see the greenback push higher over the remainder of the week should the Federal Reserve sound more upbeat this time around. As the index maintains the ascending channel from earlier this month, a less dovish Fed could set the tone for a move back towards the 10,050 figure, but we will closely watching the 30-minute relative strength index as there appears to be a bearish divergence in the oscillator. Nevertheless, we will maintain our bullish forecast for the USDOLLAR as it continues to hold above the monthly low (9,980), and we should see the correlation between risk sentiment and the dollar gradually breakdown as the Fed slowly moves away from its easing cycle.

USD_Maintains_Bullish_Trend_Rebound_To_Accelerate_On_Less_Dovish_Fed_body_ScreenShot113.png, USD Maintains Bullish Trend, Rebound To Accelerate On Less Dovish Fed

As the FOMC Minutes take center stage, we anticipate the committee to endorse a wait-and-see approach for monetary policy, and the central bank may sound more upbeat this time around as the region gets on a more sustainable path. Indeed, we should see the Fed maintain its 2014 pledge for the zero-interest rate policy (ZIRP) as the bank continues to rely on its transmission mechanism to stimulate the economy, but there is likely to be little signs for another large-scale asset purchase program as Fed officials see the recovery picking up throughout the remainder of the year. Although the index appears to have broken the bullish trend from earlier this year, the relative strength index continues to find trendline support, and we may see the dollar make another run at the 50-Day SMA (10,085) should the policy statement sap bets for QE3.

USD_Maintains_Bullish_Trend_Rebound_To_Accelerate_On_Less_Dovish_Fed_body_ScreenShot114.png, USD Maintains Bullish Trend, Rebound To Accelerate On Less Dovish Fed

The greenback weakened against two of the four components, led by a 0.14 percent rally in the Japanese Yen, while the British Pound climbed 0.08 percent against the reserve currency despite the drop in risk-taking behavior. Indeed, the sterling is bucking the trend as the ongoing turmoil in the euro-area raises the appeal of the U.K. currency, and market participants may continue to treat the pound as a safe-haven as the British government continues to pursue its aggressive budget-cutting measures. As the GBPUSD starts to carve out an upward trend, we may see the pair continue to retrace the decline from May, and the bullish sentiment surrounding the sterling may gather pace over the near-term as the Bank of England looks to maintain its current policy over the coming months.

--- 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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