USD Index Searches For Support, Euro Reversal Pattern Still In Play

By David Song, Currency Analyst

DJ FXCM Dollar Index

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

9941.38

9983.81

9940.24

-0.35

67.89%

The Dow Jones-FXCM U.S.Dollar Index ( Ticker: USDollar ) is 0.35 percent lowerfrom the open after moving 68 percent of its average true range,but we should see a rebound over the next 24-hours of trading asthe 30-minute relative strength index continues to come off ofoversold territory. The upward trend in the oscillator should pushthe index back above 10,000, and we expect the near-term rally togather pace as the fundamental outlook for the world’slargest economy continues to improve. As the Federal Reserve takesnote of the more robust recovery, market participants speculate thecentral bank to start normalizing monetary policy ahead of the2014-pledge, and we should see the Fed continue to soften itsdovish tone for monetary policy as the rise in economic activityheightens the risk for inflation.

Indeed, New York Fed President William Dudley struck an improved outlook for the region, stating that the developments coming out of the real economy have been ‘a bit more upbeat,’ and the shift in central bank rhetoric reinforces a bullish outlook for the USD as interest rate expectations gather pace. According to Credit Suisse overnight index swaps, market participants have begun to price a rate for the next 12-months, and the stickiness in inflation may continue to prop up interest rate expectations as the Fed maintains its dual mandate to ensure price stability while promoting full employment. As the USDOLLAR gives back the rally from the previous week, we are looking at 9,900 for trendline support, but we will be keeping a close eye on the relative strength index as it threatens the upward trend carried over from the previous month. Should we see a break in the oscillator, a drop in the RSI would negate our call for another run at the 78.6 percent Fib (10,118), and we may see a short-term correction before a move higher.

All four components advanced against the greenback, led by a 0.53 percent rally in the Euro, but the recent strength in the single currency is likely to be short-lived as the heightening risk for contagion continues to bear down on investor confidence. Beyond the ongoing turmoil in Greece, the weakening outlook for Spain and Portugal continues to pose a threat for the region, and we may see the EU step up its effort to address the sovereign debt crisis as the European Central Bank looks to conclude its easing cycle this year. However, the ECB may have little choice but to push the benchmark interest rate below 1.00% as the governments operating under the single currency become increasingly reliant on monetary support, and we will maintain our bearish call for the euro as it continues to carve out a head-and-shoulders top in March. As long as the February 9 high (1.3320) holds, we should see the major reversal pattern pan out over the near-term, and a close below 1.3000 could open the door for another test of the 23.6 percent Fib from the 2009 high to the 2010 low around 1.2630-50 as the fundamental outlook for the region remains bleak.

--- Written by David Song, Currency Analyst

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

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Original Article: http://www.dailyfx.com/forex/fundamental/us_dollar_index/daily_dollar/2012/03/19/USD_Index_Searches_For_Support_Euro_Reversal_Pattern_Still_In_Play.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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