USD Rebound To Gather Pace, Sterling Outlook Remains Bearish

By David Song, Currency Analyst

DJ FXCM Dollar Index

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

9726.60

9766.21

9694.59

-0.25

79.16%

The Dow Jones-FXCM U.S.Dollar Index ( Ticker: USDollar ) remains 0.25 percentlower from the open after moving 79 percent of its average truerange, and the greenback may continue to retrace the overnightdecline to 9,693 as the 30-minute relative strength index bouncesback from a low of 29. As the dollar index breaks out of thedownward trending channel from earlier this month, we may see thegreenback consolidate over the remainder of the week, and the gaugemay work its way back towards 9,800 as it pares the decline fromthe beginning of the week. However, dovish comments coming out ofthe Federal Reserve may weigh on the exchange rate, and the reservecurrency may face additional headwinds over the near-term as thecentral bank keeps the door open to conduct another round ofquantitative easing.

Indeed, the USD appears to be carving a bottom this week as it continues to find support around the 38.2 percent Fibonacci retracement (9,708), and we may see the greenback continue to recoup the losses from earlier this month as market sentiment appears to be turning over. As heightening uncertainties surrounding the global economy bears down on investor confidence, we may see another flight to safety emerge over the coming days, and the dollar index may resume the rebound from 9,395 as market participants scale back their appetite for yields. However, the Fed’s Beige Book may dampen the appeal of the reserve currency as we expect the central bank to maintain a cautious outlook for the world’s largest economy, and the survey may highlight an increased willingness to expand monetary policy further as the region faces a slowing recovery. In turn, we are likely to see the FOMC carry its easing cycle into the following year, and the committee may implement a range of policy tools to stimulate the ailing economy in an effort to mitigate the risk of a double-dip recession.

All four components advanced against the greenback on Wednesday, led by a 0.62 percent advance in the British Pound, but the recent strength in the sterling may be short-lived as the Bank of England maintains a dovish outlook for monetary policy. As the BoE votes unanimously to expand its asset purchase program to GBP 275B, increased concerns of undershooting the 2 percent target for inflation may encourage the MPC to ease policy further, and the central bank may keep the door open to conduct more QE as the board maintains its dual mandate to ensure price stability while fostering full-employment. Expectations for additional monetary stimulus continues to instill a bearish outlook for the sterling, and the GBP/USD may threaten the rebound from 1.5273 as the fundamental outlook for the U.K. deteriorates.

--- Written by David Song, Currency Analyst

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

To be added to David's e-mail distribution list,send an e-mail with subject line "Distribution List" todsong@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/2011/10/19/USD_Rebound_To_Gather_Pace_Sterling_Outlook_Remains_Bearish.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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