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USD to Look Higher on Stronger Recovery- Euro Rebound at Risk

USD to Look Higher on Stronger Recovery- Euro Rebound at Risk

David Song, Strategist

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

10441.08

10452.74

10438.22

-0.07

28.03%

Forex_USD_to_Look_Higher_on_Stronger_Recovery-_Euro_Rebound_at_Risk_body_ScreenShot096.png, USD to Look Higher on Stronger Recovery- Euro Rebound at Risk

Chart - Created Using FXCM Marketscope 2.0

Although the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is trading 0.07 percent lower from the open, we may see the greenback regain its footing during the North American trade as the economic docket is expected to highlight a rebound in demands for U.S. Durable Goods along with higher home prices. However, as a downward trending channel appears to be taking shape, we may see further correction in the dollar, which could pave the way for a break below the 10,400 region. Until the bearish trend is broke, we will keep a close eye on former trendline resistance, which could offer near-term support, but the reserve currency may regain its footing over the next 24-hours of trading should the fundamental developments coming out of the world’s largest economy highlight a more broad-based recovery.

Forex_USD_to_Look_Higher_on_Stronger_Recovery-_Euro_Rebound_at_Risk_body_ScreenShot097.png, USD to Look Higher on Stronger Recovery- Euro Rebound at Risk

Although U.S. consumer confidence is expected to fall back from a three-month high, demands for large-ticket items are projected to increase 3.95 in February, while the S&P/Case-Shiller Home Price index is anticipated to show an annualized gain of 7.8 percent in January, which would mark the fastest pace of growth since June 2006. The expected 3.9 percent decline in New Home Sales may have limited impact after marking the biggest advance since 1993 during January, while the Richmond Fed Manufacturing index is projected to hold steady at 6 in March.

Nevertheless, New York Fed President William Dudley argued monetary policy should remain ‘very accommodative’ as he sees a ‘fiscal drag’ of 1.75 percentage points in 2013, and warned that the greatest risk to the economy comes from ‘fiscal restraint’ as the government struggles to get its house in order. At the same time, Fed Chairman Ben Bernanke said the easing cycle enacted by the major central banks has held the world economy as they face a slow recovery, but the FOMC may adopt a more neutral to hawkish tone in the coming months should the data continue to highlight a more broad-based recovery. We will be watching the relative strength index, with support coming in around the 41 figure, as the technical outlook points to future declines, but the dollar may continue to consolidate above the 10,400 figure amid the shift in the policy outlook.

Forex_USD_to_Look_Higher_on_Stronger_Recovery-_Euro_Rebound_at_Risk_body_ScreenShot102.png, USD to Look Higher on Stronger Recovery- Euro Rebound at Risk

Two of the four components advanced against the greenback, led by a 0.19 percent rally in the Euro, but the single currency may face additional headwinds in the days ahead amid the threat of a bank run in Cyprus. As the financial turmoil in the periphery country dampens the appeal of other popular offshore banking centers, the flight to safety may further diminish demands for the single currency, and the EURUSD may continue to work its way back towards the 23.6 percent Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as the precedence set by the Cyprus bailout has broader implications for the region.

--- Written by David Song, Currency Analyst

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

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