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Forex: USD Rally Accelerates On FOMC Minutes- QE To Wind Down in 2013

Forex: USD Rally Accelerates On FOMC Minutes- QE To Wind Down in 2013

David Song, Strategist

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

10084.01

10084.77

10032.48

0.49

134.53%

Forex_USD_Rally_Accelerates_On_FOMC_Minutes-_QE_To_Wind_Down_in_2013_body_ScreenShot143.png, Forex: USD Rally Accelerates On FOMC Minutes- QE To Wind Down in 2013

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.49 percent higher from the open as the Federal Open Market Committee (FOMC) Minutes talked down expectations for additional monetary support, and the dollar should appreciate further over the remainder of the week as market participants scale back bets for more quantitative easing. As the 30-minute relative strength index approaches overbought territory, we should see a small correction ahead of the highly anticipated Non-Farm Payrolls report, but we will look for additional dollar advance over the near-term as the Fed gets closer to the end of its easing cycle. As the USDOLLAR breaks out of the downward trend from November, the break reinforces a bullish outlook for the near-term, and the dollar may appreciate further throughout the beginning of 2013 as the fundamental outlook for the U.S. improves.

Forex_USD_Rally_Accelerates_On_FOMC_Minutes-_QE_To_Wind_Down_in_2013_body_ScreenShot144.png, Forex: USD Rally Accelerates On FOMC Minutes- QE To Wind Down in 2013

Indeed, the FOMC Minutes showed several members pushing to halt or cut the non-standard measures before the end of 2013, while a few saw scope to retain its quantitative easing measures until the end of the year in an effort to encourage a stronger recovery. At the same time, nearly all members saw the potential costs of QE increasing over the near to medium-term, while the outlook for inflation is now ‘broadly balanced’ as the economic recovery gradually gathers. As the Fed scales back its willingness to expand the balance sheet further, we would see the upward trend from September continue to take shape, and the index looks poised to threaten the 10,100 figure as market participants curb bets for more easing. However, we will be keeping a close eye on the relative strength index as it approaches overbought territory, and we may see a near-term correction in the week ahead as the dollar comes up against trendline resistance.

Forex_USD_Rally_Accelerates_On_FOMC_Minutes-_QE_To_Wind_Down_in_2013_body_ScreenShot145.png, Forex: USD Rally Accelerates On FOMC Minutes- QE To Wind Down in 2013

Three of the four components weakened against the greenback, led by a 0.93 percent decline in the Euro, while the British Pound shed 0.62 percent despite the positive development coming out of the U.K. As the Bank of England (BoE) quarterly Credit Conditions Survey strikes an improved outlook for the U.K., we may see the November Mortgage Approvals top market expectations, and the sterling may regain its footing over the next 24-hours of trading as the heightening risk for inflation dampens the BoE’s scope to provide additional monetary support. Nevertheless, as the relative strength index comes off of overbought territory, we may see the GBPUSD consolidate ahead of the central bank interest rate decision on tap for the following week, but the shift in the policy outlook encourages a bullish forecast for the British Pound as the Monetary Policy Committee slowly moves away from its easing cycle.

--- 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, please follow this link.

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