USD To Consolidate Ahead Of FOMC, Yen Weakness To Be Short-Lived

By David Song, Currency Analyst

DJ FXCM Dollar Index

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

9621.6

9699.59

9463.26

1.62

236.61%

The Dow Jones-FXCM U.S.Dollar Index ( Ticker: USDollar ) is 1.62 percent higherfrom the open after moving 237 percent of its average true range,and the reserve currency may continue to retrace the sharp declinefrom earlier this month as market sentiment falters. However, thepullback from 9,698 may keep the USD confined ahead of the FOMCinterest rate decision on tap for later this week, and thegreenback may hold steady during the first-half of the week asmarket participants weigh the outlook for monetary policy. As the30-minute relative strength index falls back from a high of 91, thereserve currency looks poised to consolidate throughout theremainder of the day, but the USD may face additional headwindsthis week should the Fed talk up speculation for additionalmonetary support.

As the USD fails to push back above the 38.2 percent Fibonacci retracement around 9,708, the bullish sentiment underlying the reserve currency may taper off going into the middle of the week, and the greenback may struggle to hold its ground should the Fed keep the door open to conduct another round of quantitative easing. However, as the recent developments coming out of the world’s largest economy heighten the outlook for growth and inflation, we may see Fed Chairman Ben Bernanke soften his dovish tone for monetary policy, and the committee may endorse a wait-and-see approach for the remainder of the year as central bank officials see a stronger recovery ahead. As speculation for QE 3 deteriorates, the development should help to prop up the greenback, and the rebound from 9,454 may turn into a larger correction as the fundamental outlook for the U.S. improves.

All four componentsweakened against the greenback, led by a 2.79 percent decline inthe Yen, and the low-yielding currency may face additionalheadwinds over the near-term as Japanese policy makers step uptheir efforts to stabilize the exchange rate. Indeed,Japan’s Ministry of Finance intervened in theforeign exchange market, which was confirmed by Fin. Min. JunAzumi, and the government may take additional steps to stem themarked appreciation in the local currency as it curbs the prospectsfor an export-led recovery. However, the market reaction to the Yenintervention may be short-lived as the USD/JPY paresthe sharp rally to 79.52, and we may see the Yen trade higher inthe days ahead as investors scale back their appetite for risk.Nevertheless, it seems as though retail traders are still lookingfor higher prices in the dollar-yen as the DailyFX SpeculativeSentiment index currently stands at 4.51, and the contrarianindicator continues to highlight a downside risk for the USD/JPY asthe retail FX crowd tries to fade the downward momentum in theexchange rate.

--- 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/2011/10/31/USD_To_Consolidate_Ahead_Of_FOMC_Yen_Weakness_To_Be_Short-Lived.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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