USD Continues To Build Base Ahead Of FOMC, JPY At Risk On BOJ Policy

By David Song, Currency Analyst

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

9921.56

9947.47

9913.22

-0.08

63.39%

Although the Dow Jones-FXCM U.S. Dollar Index(Ticker: USDollar ) remains 0.09 percent lower from the open, weremain bullish on the reserve currency as it continues to findsupport around the 9,900 figure. As the FOMC interest rate decisiontakes center stage, the descending triangle may continue to takeshape over the next 24-hours of trading, but the greenbackcertainly appears to be building a short-term base for a movehigher as the Fed talks down speculation for another round ofquantitative easing. Indeed, a less dovish statement paired with ahigher forecast for growth and inflation may ultimately spark abullish breakout in the index, and we may see the Fed adopt amildly hawkish tone amid the stickiness in underlying pricegrowth.

As the USDOLLAR continues to threaten the upward trending channel from earlier this year, we’re certainly keeping a close eye on the bearish divergence in the relative strength index, and the greenback may come under increased pressure should the Fed take additional steps to encourage a stronger recovery. Rather than pushing through another large-scale asset purchase program, the FOMC may look to extend ‘Operation Twist’ as its scheduled to expire in June, but it seems as though the Fed will gradually unwind its emergency measures as central bank officials become increasingly upbeat towards the economy. Indeed, FOMC board member Janet Yellen said the conclusion to ‘Operation Twist’ should not be seen ‘as a tightening of policy,’ and went onto say that she would only support more easing should the economic recovery falter. In turn, it seems as though the Fed will conclude its easing cycle towards the end of the year, and we may see the committee start to draw up a tentative exit strategy as growth prospects improve.

The greenback gained ground against two of the four components, led by a 0.13 percent decline in the Australian dollar, which was followed by a 0.01 percent drop in the Japanese Yen. As the USDJPY remains capped by the 20-Day SMA (81.59), we may see the pair continue to track sideways ahead of May, but the deviation in monetary policy could spark a sharp rally in the USDJPY as the Bank of Japan pledges to meet the 1 percent target for inflation. As the BoJ looks to carry out its easing cycle throughout 2012, the shift in the Fed’s policy outlook certainly instills a bullish forecast for the USDJPY, and it seems as though the pair has carved out a higher low in April as the relative strength index continues to come off of the lows. In turn, we may see the dollar-yen resume the advance from earlier this year, and the pair looks poised to mark fresh highs throughout 2012 as the Fed curbs bets for more easing.

--- Written by David Song, Currency Analyst

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

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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/2012/04/24/USD_Continues_To_Build_Base_Ahead_Of_FOMC_JPY_At_Risk_On_BOJ_Policy.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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