USD Outlook Hinges On FOMC, Euro Still Carving Head-and-Shoulders Top

By David Song, Currency Analyst

Talking Points
  • U.S. Dollar: Index Hits Fresh Monthly High, All Eyes On FOMC
  • Euro: ECB Non-Standard Measures Under Scrutiny, Watch The 50-Day SMA
  • British Pound: Bucks Trend, Holds Previous Day’s Range

U.S. Dollar: Index Hits Fresh Monthly High, All Eyes On FOMC

The greenback pared the decline from the overnight trade, with the Dow Jones- FXCM U.S. Dollar Index (Ticker: USDOLLAR ) advancing to a fresh monthly high of 10,037, and the near-term rally may gather pace going into the middle of the week should the Federal Reserve talk down speculation for another large-scale asset purchase program. Although the FOMC is widely expected to maintain its current policy in March, the more robust recovery may encourage the central bank to raise its fundamental assessment for the world’s largest economy, and we may see Chairman Ben Bernanke refrain from commenting on QE3 as growth and inflation picks up.

Nevertheless, there’s speculation that the committee will extend ‘Operation Twist’ amid the ongoing weakness in the housing market, but the board may look to conclude its easing cycle in 2012 as the recovery gets on a more sustainable path. The shift in the policy outlook has certainly dampened the correlation between risk and the USD and we should see fundamentals play a greater role in dictating price action for the dollar as the Fed softens its dovish tone for monetary policy. In turn, the bullish sentiment underlining the greenback should gather pace over the near-term, and the USDOLLAR looks poised to make another run at the 78.6% Fibonacci (10,118) as it carves out a lower high in March.

Euro: ECB Non-Standard Measures Under Scrutiny, Watch The 50-Day SMA

The Euro slipped to a fresh weekly low of 1.3051 as European Central Bank President Mario Draghi talked down the risk for inflation, and the single currency may continue to give back the advance from earlier this year as the fundamental outlook for Europe remains bleak. Although the ECB remains upbeat about second Long Term Refinancing Operation, the Bundesbank warned that the Governing Council’s non-standard measures has increased the counter-party risk for Germany’s central bank, and we may see the President Draghi move away from bond purchases as the ballooning balance sheet comes under scrutiny. In turn, Mr. Draghi may target the benchmark interest rate to pull the euro-area out of recession, and we may see the central bank ease policy further later this year in order to encourage a sustainable recovery. As the EURUSD fails to hold above the 50-Day SMA (1.3090), we are looking for a close below the moving average to see another move to the downside, and the pair may come up against the 23.6% Fib from the 2009 high to the 2010 low around 1.2630-50 to test for support.

British Pound: Bucks Trend, Holds Previous Day’s Range

The British Pound bucked the trend and bounced back from a low of 1.5620 to hold within the previous day’s range, but the sterling may come under pressure over the next 24-hours of trading as the economic docket is expected to instill a weakening outlook for the U.K. As U.K. jobless claims are expected to increase another 5.0K in February, the ongoing weakness in the labor market may drag on the exchange rate, and the pound-dollar may continue to give back the advance from earlier this year as currency traders see the BoE taking additional steps to shore up the ailing economy. Indeed, the downward trend in the relative strength index casts a bearish outlook for the GBPUSD, and we may see the exchange rate fall back towards the 50.0% Fib from the 2009 low to high around 1.5300 should 1.5600 give way.

--- Written by David Song, Currency Analyst

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

To be added to David 's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong @dailyfx.com.

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Related Articles: Weekly Currency Trading Forecast

F X Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

IBD/TIPP Economic Optimism (MAR)

50.3

49.4

USD

14:00

10:00

Business Inventories (JAN)

0.60%

0.40%

USD

18:15

14:15

Federal Open Market Committee Interest Rate Decision

0.25%

0.25%

Currency

GMT

Release

Expected

Actual

Comments

NZD

21:45

Food Prices (MoM) (FEB)

--

0.6%

First rise in 2012.

NZD

23:00

QV House Prices (YoY) (FEB)

--

2.9%

Fastest pace of growth since August 2010.

JPY

23:50

Tertiary Industry Index (MoM) (JAN)

0.2%

-1.7%

Largest decline since March 2011.

GBP

0:01

RICS House Price Balance (FEB)

-14%

-13%

Smallest decline since July 2010.

AUD

0:30

Home Loans (JAN)

-0.6%

-1.2%

Declines for the first time since March 2011.

AUD

0:30

Investment Lending (JAN)

--

-7.1%

AUD

0:30

Value of Loans (MoM) (JAN)

--

0.1%

AUD

0:30

NAB Business Conditions (FEB)

--

3

Highest since April.

AUD

0:30

NAB Business Confidence (FEB)

--

1

JPY

5:07

Bank of Japan Interest Rate Decision

0.10%

0.10%

Sets up a JPY 1T program for USD loans.

EUR

6:30

French Consumer Price Index (MoM) (FEB)

0.4%

0.4%

Holds at the slowest rate since October.

EUR

6:30

French Consumer Price Index (YoY) (FEB)

2.4%

2.3%

EUR

6:30

French CPI - EU Harmonised (MoM) (FEB)

0.5%

0.5%

EUR

6:30

French CPI - EU Harmonised (YoY) (FEB)

2.6%

2.5%

EUR

6:30

French CPI ex Tobacco Index (FEB)

123.66

123.58

EUR

7:45

French Current Account (euros) (JAN)

--

-4.2B

Largest since October.

CHF

8:15

Producer & Import Prices (MoM) (FEB)

0.2%

0.8%

Smallest contraction since October.

CHF

8:15

Producer & Import Prices (YoY) (FEB)

-2.4%

-1.9%

EUR

9:00

Italian CPI (NIC incl. tobacco) (MoM) (FEB F)

0.4%

0.4%

Rises for the first time since October.

EUR

9:00

Italian CPI (NIC incl. tobacco) (YoY) (FEB F)

3.3%

3.3%

EUR

9:00

Italian CPI - EU Harmonized (MoM) (FEB F)

0.2%

0.2%

EUR

9:00

Italian CPI - EU Harmonized (YoY) (FEB F)

3.4%

3.4%

GBP

9:30

Visible Trade Balance (Pounds) (JAN)

-7.900B

-7.532B

Largest deficit since November.

GBP

9:30

Trade Balance Non EU (Pounds) (JAN)

-4.300B

-3.678B

GBP

9:30

Total Trade Balance (Pounds) (JAN)

-1.900B

-1.762B

GBP

9:30

DCLG UK House Prices (YoY) (JAN)

--

0.2%

Rises for the second month.

EUR

10:00

Euro-Zone ZEW Survey (Economic Sentiment) (MAR)

--

11.0

Highest since May 2011.

EUR

10:00

German ZEW Survey (Economic Sentiment) (MAR)

10.0

22.3

Highest reading since June 2010.

EUR

10:00

German ZEW Survey (Current Situation) (MAR)

41.5

37.6

USD

11:30

NFIB Small Business Optimism (FEB)

94.5

94.3

Highest since February.

USD

12:30

Advance Retail Sales (FEB)

1.1%

1.1%

Biggest advance since September.

USD

12:30

Retail Sales Less Autos (FEB)

0.7%

0.9%

USD

12:30

Retail Sales Less Auto & Gas (FEB)

0.5%

0.6%
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Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/us_open/2012/03/13/USD_Outlook_Hinges_On_FOMC_Euro_Still_Carving_Head-and-Shoulders_Top.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.