USD Index Struggles To Hold Trend Ahead Of FOMC, GBP Looks Higher

By David Song, Currency Analyst

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

9915.46

9965.33

9913.11

-0.40

94.13%

Although t he Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar ) remains 0.40 percent lower on the day, we may see the reserve currency consolidate throughout the North American session as the 30-minute relative strength index bounces back from oversold territory. With support coming up at 9,900 a breach below the key figure could open the door for another selloff, but we will maintain our bullish outlook for the greenback as the recovery in the world’s largest economy gets on a more sustainable path. With the slew of market-moving event risks on tap for the following week, we should see the dollar hold steady as market participants turn their attention to the Federal Open Market committee interest rate decision on Wednesday.

As the USDOLLAR comes up against the lower bounds of the upward trending channel, a break here would reinforce the bearish divergence in the RSI, which should pull the index back towards the 50.0 percent Fibonacci retracement around 9,830. At the same time, if we see the dollar maintain the bullish formation, we could see the greenback continue to build a short-term base to make another run at the 78.6 percent Fib at 10,118. Nevertheless, as the FOMC rate decision highlights the biggest event risk for the following week, the fresh batch of central bank rhetoric will have heavy implications for short-term price action, and we will look for any hawkish comments to strengthen our bullish outlook for the reserve currency. In light of the recent comments from Fed officials, it seems as though the board will start to lay out a tentative exit strategy ahead of the second-half of the year, and the committee look to target the risk for inflation amid the stickiness in underlying price growth. In turn, we may see the upward trend continue to take shape in May, and the shift in the Fed’s policy outlook could pave the way for fresh 2012 highs as the dollar appears to be carving a long-term uptrend.

The dollar weakened across the board, led by a 0.61 percent advance in the euro, while the British Pound climbed 0.49 to reach a fresh yearly high of 1.6143. As the Fed changes its tune, it seems as though the Bank of England will follow suit amid the resilience in core inflation, and the sterling may continue to track higher in May as it searches for resistances. As the GBPUSD comes up against the 23.6 percent Fib from the 2009 low to high around 1.6250, we anticipate to see fresh yearly highs in the days ahead, and we will maintain our bullish forecast for the British Pound as the BoE moves away from its easing cycle.

--- Written by David Song, Currency Analyst