USD Outlook Hinges On FOMC Minutes, Yentervention Threats Resurface

DJ FXCM Dollar Index

Index	Last	High	Low	Daily Change (%)	Daily Range (% of ATR)
DJ-FXCM Dollar Index	9929.91	9946.39	9889.2	0.13	57.05%

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.13 percent higher from the open after moving 57 percent of its average true range, and the greenback may continue to recoup the losses from the overnight trade should the flight to safety gather pace. However, as the USD falls back within the upward trending channel from earlier this month, the pullback from 9,945 may turn into a larger correction, and we may see the greenback trade heavy over the coming days should the Fed keep the door open to expand monetary policy further. In turn, we may see the index tag the lower Bollinger Band around 9,888, but the reserve currency may threaten the upward trend should market participants raise bets for another round of quantitative easing.

As the near-term rally in the USD tapers off ahead of the 61.8 percent Fibonacci retracement around 9,947, the greenback looks poised for a near-term correction, and the index may fall back towards the 38.2 percent Fib around 9,708 to test for near-term support. As the relative strength index approach overbought territory, the oscillator should provide conviction to see a pullback in the reserve currency, and we should see the greenback consolidate in the days ahead as long as the RSI holds below 70. However, as the 20-Day SMA (Blue) looks poised to cross back above the 50-Day SMA (Green) at 9,790, the technical developments reinforce a bullish outlook for the dollar as they carve out a higher low. Nevertheless, the FOMC meeting minutes could weigh on the exchange rate should the central bank talk up speculation for QE3, but the statement could highlight a growing rift within the committee as Fed officials expect economic activity to gather pace over the coming months. As policy makers see the world’s largest economy avoiding a double-dip recession, Fed Chairman Ben Bernanke may no longer see a case for additional monetary support, and the developments are likely to instill a bullish outlook for the USD as the central bank concludes its easing cycle.

Two of the four components weakened against the greenback on Tuesday, led by a 0.23 percent decline in the Japanese Yen, but the USD/JPY may continue to retrace the market reaction to the intervention at the end of October as the pair remains capped by the 100-Day SMA around 77.34. As the dollar-yen trades within a downward trending channel, the pair should continue to pare the overnight advance to 77.32, but the recent strength in the low-yielding currency appears to be fueling expectations for another intervention as Japanese policy makers try to balance the risks for the region. Indeed, retail trades remain net long against the USD/JPY as the DailyFX Speculative Sentiment index currently holds at 6.25, and market participants may become increasingly bullish on the dollar-yen as it pares the sharp rebound from 75.57.

source from: dailyfx