USD Index Eyes 10,000 On Less Dovish Fed, JPY Reversal On Tap

By David Song, Currency Analyst

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

9968.98

9973.91

9927.77

0.41

97.16%

The Dow Jones-FXCM U.S. Dollar Index(Ticker: USDollar ) is 0.40 percent higher from the open aftermoving 97 percent of its average true range, and we should see thegreenback continue to retrace the decline from April as the upwardtrending channel from the beginning of the month continues to takeshape. In turn, we should see the index work its way back towardsthe key 10,000 figure, and we will maintain our bull call for thedollar as the Federal Reserve continues to soften its dovish tonefor monetary policy. Nevertheless, we may see a small pullbackgoing into the middle of the week as the 30-minute relative strength index movesback into overbought territory, but the shift in the Fed’spolicy outlook should prop up the USD as the central bank continuesto talk down speculation for additional monetarysupport.

Indeed, New York Fed President William Dudley, who also serves as a permanent member of the FOMC, continued to soften his dovish tone for monetary policy amid the stickiness in underlying inflation, and said that the central bank will bring quantitative easing to a halt ‘ ‘the moment they become inconsistent w ith our dual mandate objectives.’ As the more robust recovery raises the risk for inflation, we should see the Fed move away from its easing cycle, and the central bank may start to discuss a tentative exit strategy as the economy gets on a more sustainable path. As the index continues to carve out a series of higher lows, we are still looking for another run at the 78.6 percent Fibonacci retracement around 10,118, and we should see currency traders turn increasingly bullish against the USD as the Fed continues to curb speculation for another large-scale asset purchase program.

Three of the four components weakened against the greenback, led by a 0.99 percent decline in the Australian dollar, while the Japanese bucked the trend to advance 0.14 percent on the day. Although the USDJPY continues to trade within a downward trending channel, we’re still watching the bullish flag formation as it appears to be building a short-term base around the 100-Day SMA at 76.65. In turn, the dollar-yen looks poised to reverse course, and we should see the pair resume the advance from earlier this year as the Bank of Japan pledges to carry its easing cycle into the second-half of 2012. As a result, we need to see the pair clear and close above the 20-Day SMA (80.62) to see a meaningful rebound in the exchange rate, and we expect to see fresh yearly highs in the USDJPY amid the deviation in the policy outlook.

--- 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/2012/05/08/USD_Index_Eyes_10000_On_Less_Dovish_Fed_JPY_Reversal_On_Tap.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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