USD Correction In Progress, Euro To Face Increased Volatility

By David Song, Currency Analyst

DJ FXCM Dollar Index

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

9921.36

9947.03

9909.65

-0.13

64.66%

The Dow Jones-FXCM U.S.Dollar Index ( Ticker: USDollar ) is 0.13 percent lowerfrom the open after moving 65 percent of its average true range,and we may see the greenback continue to give back the advance fromearlier this week as it threatens the upward trending channel fromthe end of February. As the 30-minute relative strength index fallsback from a high of 67, we may get a small pullback before anothermove to the upside, and we will keep a close eye on 9,900 as formerresistance should now act as new support. Nevertheless, as theongoing improvement in the labor market dampens the Fed’sscope to push through another large-scale asset purchase program,the rebound from 9,738 should gather pace in March, and we may seemarket participants turn increasingly bullish against the USD asthe central bank scales back its dovish tone for monetarypolicy.

The technicals certainly fosters a bullish outlook for the USD as the 10-Day (9,850) and 20-Day (9,829) SMA’s look poised to cross above the 50-Day (9,855), but the lack of momentum to clear the key 61.8 percent Fibonacci retracement could ultimately produce a short-term correction in the index. In turn, the USDOLLAR index may revert back to the 50.0 percent Fib before we eventually get a move higher, and we expect to see another run at the 78.6 percent Fib (10,118) as the fundamental outlook for the world’s largest economy improves. As the recovery gets on a more sustainable path, we may see the FOMC scale back its pledge to retain the zero interest rate policy (ZIRP) well into 2014, and the committee show a greater willingness to start normalizing monetary policy towards the end of the year as growth picks up.

Three of the fourcomponents rallied against the greenback, led by a 0.33 percentadvance in the Euro, and headlines coming out of the region maycontinue to prop up the single currency as Greece rushes to reach adeal with private creditors. As the Greek PSI talks take centerstage, hopes of averting a default could prop up the EURUSD overthe next 24-hours of trading, and we will also be keeping a closeeye on the European Central Bank interest rate decision as marketparticipants see the Governing Council expanding monetary policyfurther in 2012. Beyond the rate announcement, we’re veryinterest to hear the policy statement from ECB President MarioDraghi amid the recent rise in overnight deposits, and it seems asthough the second Long Term RefinancingOperation may not be having the desired effect as commercial bankshorde cash, and the central bank head may see scope to push thebenchmark interest rate below 1.00% in an effort to pull theeconomy out of recession. Nevertheless, with the slew of majorevent risks on tap for the remainder of the week, we may seewhipsaw-like price action in the EURUSD, but the pair remainspoised to weaken further over the near-term as European policymakers struggle to restore investor confidence.

--- 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/2012/03/07/USD_Correction_In_Progress_Euro_To_Face_Increased_Volatility_.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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