DJ FXCM Dollar Index

The Dow Jones-FXCM U.S. Dollar Index (Ticker:USDollar) is 0.31 percent higher on the day after moving 59 percent of its average true range, and the greenback should continue to retrace the sharp decline from 10,134 as it maintains the upward trending channel from earlier this month. However, as the 30-minute relative strength index falls back from a high of 73, the pullback from 9,865 may turn into a larger correction, and we may see the index consolidate going into the end of the week as the recent comments by Fed officials clouds the outlook for monetary policy. In turn, we may see the USD fall back towards former resistance around 9,750 to test for near-term support, but the greenback may threaten the advance from earlier this month should the central bank continue to talk up speculation for another round of quantitative easing.

Indeed, San Francisco Fed President John Williams said additional easing ‘may be needed’ given the ongoing weakness in the labor market, while St. Louis Fed President James Bullard argued that the recovery ‘has to falter from its current pace’ for the FOMC to expand monetary policy further. The recent rhetoric from central bank officials certainly reflects a growing rift amongst the policy makers, and it seems as though we will see the FOMC carry its current policy into 2012 as the committee struggles to meet on common ground. As the USD struggles to hold above the 50.0 percentFibonacci retracement around 9,828, the advance from earlier this may taper off over the next 24-hours of trading, and the greenback may continue to face range-bound prices over the near-term as market participants weigh the prospects for future policy.

Three of the four components weakened against the greenback once again, led by a 0.40 percent decline in the Australian dollar. However, as the AUD/USD continues to hold above the monthly low (1.0052), the pair remains poised for a correction, and the high-yielding currency may regain its footing over the remainder of the week should Reserve Bank of Australia Governor Glenn Stevens talk down speculation for a rate cut in December. As the central bank head is scheduled to speak at 21:30 GMT, comments from Mr. Stevens are likely to spark increased volatility in the exchange rate, but the bearish sentiment underlying the aussie may gather pace as investors continue to look for lower interest rates. According to Credit Suisse overnight index swaps, market participants are looking for a 25bp rate cut in December, while they see the benchmark interest rate being scaled back by more than 150bp over the next 12-months. As interest rate expectations falter, the AUD/USD may extend the sharp reversal from 1.0752, which could give way to support around 1.0050.

--- Written by David Song, Currency Analyst

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