USD Rebound On Tap, Sterling To Face Sideways Price Action

By David Song, Currency Analyst

DJ FXCM Dollar Index

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

10049.81

10079.23

10017.74

-0.06

70.92%

The Dow Jones-FXCM U.S.Dollar Index ( Ticker: USDollar ) is 0.06% lower on theday after moving 71% of its average true range, and we may see thegreenback threaten the upward trend carried over from the previousmonth as market participants increase their appetite for risk.However, the bullish divergence in the 30-minute relative strengthindex could spur a rebound in the USD, and the reserve currency maycontinue to recoup the losses from earlier this year as theuncertainties surrounding the global economy weighs on risk-takingbehavior. In turn, the rebound in risk is likely to be short-lived,and the reserve currency may push higher ahead of Friday’sNon-Farm Payrolls report as it benefits from safe-havenflows.

In light of the recent price developments, it seems as though the USD may be carving out a near-term top around the 78.6% Fibonacci retracement around 10,117, but the greenback should appreciate further over the near-term as long as we see the RSI hold above 70. As NFP’s are expected to show a protracted recovery in the labor market, the tepid pace of job growth could instill a bearish outlook for the greenback, and the reserve currency may give back the advance from the previous month as the data dampens the outlook for future growth. In turn, the Federal Reserve may keep the door open to expand monetary policy further, and the central bank may show an increased willingness to conduct another round on quantitative easing as the world’s largest economy faces an increased risk of a double-dip recession. As speculation for QE3 intensifies, the pullback in the USD may turn into a larger correction, and the index may fall back towards the 61.8% Fib around 9,947 to test for near-term support.

Three of the fourcomponents weakened against the greenback, led by a 0.42% declinein the British Pound, and the sterling may continue to lose groundover the near-term as the fundamental outlook for the U.K.deteriorates. Although the Bank of England is widely expected tomaintain its current policy in October, the meeting minutes due outon the 19 th may highlight anincreased willingness to expand the asset purchase program beyondthe GBP 200B target, and the MPC may carry its easing cycle intothe following year as the central bank sees a risk of undershootingthe 2% target for inflation. As a result, we may see the GBP/USDcontinue to consolidate ahead of the policy statement, but theexchange rate may work its way back towards the 50.0% Fibonacciretracement from the 2009 low to high around 1.5250 as the BoEmaintains a cautious outlook for the region.

--- Written by David Song, Currency Analyst Tocontact David, e-mail dsong@dailyfx.com.

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DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/us_dollar_index/daily_dollar/2011/10/05/USD_Rebound_On_Tap_Sterling_To_Face_Sideways_Price_Action.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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