The Dow Jones-FXCM U.S. Dollar index pared the decline from earlier this week and the rebound should gather pace over as currency traders scale back their appetite for yields. The USD is 1.29% higher on the day after moving 189% of its average true range, and the greenback looks poised to make another run at 9800.00 as there appears to be a major shift in risk-taking behavior. However, as the rally remains heavily overbought, with price action coming up against the upper bounds of the channel, we should see a correction over the next 24-hours of trading once the relative strength index falls back below 70. Nevertheless, the inverse head-and-shoulders reversal from 9450.00 should gather pace as the index resumes an upward trend, and the rebound in the U.S. dollar may accelerate ahead of the FOMC interest rate decision on June 22 as the committee plans to unwind the additional $600B in quantitative easing.
In light of the recent developments coming out of the world’s largest economy, Fed Chairman Ben Bernanke may soften his dovish outlook for monetary policy as the headline reading for inflation rises at the fastest pace since October 2008. As price growth accelerates, the FOMC may continue to phase out its emergency programs, and the central bank may adopt a hawkish tone in the second-half of the year as it expects the recovery to pick up over the coming months. However, the committee may look to retain its zero interest rate policy throughout the remainder of the year given the ongoing weakness within the real economy.
All four components weakened against the greenback on Wednesday, led by a 1.80% drop in the euro, and the single-currency is likely to face additional headwinds over the near-term as fears surrounding the sovereign debt crisis bears down on investor confidence. As the EU delays the second tranche of the EUR 110B bailout for Greece, the heightening risk for a default is likely to exacerbate the bearish sentiment weighing on the euro, and the common currency may continue to threaten the rebound from May (1.3969) as Prime Minister George Papandreou faces increased pressures to resign. As the fundamental outlook for European remains clouded with high uncertainty, the Governing Council may have little choice but to delay its exit strategy further, and central bank President Jean-Claude Trichet may soften his hawkish tone for monetary policy as the EU struggles to contain the debt crisis.
Tags: dow jones currency traders relative trading resumes trend reading
© Copyright 2012, Inc. All rights reserved.