Dollar index challenges trend reversal

The greenback was weaker in North American trade on Wednesday with the Dow Jones FXCM Dollar Index (Ticker: USDollar) off by 0.33% at the close of the session. The losses come on the back of a reversal in equities that saw the Dow, the S&P 500, and the NASDAQ pare early losses to close higher by 0.25%, 0.50% and 0.89% respectively. Although the ADP employment report topped expectations, the markets failed to rally until later in the day with the Dow snapping an eight-day losing streak. The dollar was mixed early in the session, with the index encountering support at the 9450 mark noted in yesterday’s USD Trading Today report.

An hourly chart (below) sees the index forming a new ascending channel after failing to break below the 138.2% Fibonacci extension taken from the May 23rd and July 12th crests at 9335. Support for the dollar remains at the 123.6% extension at 9380 with interim resistance seen at the 100% extension at 9450 and the convergence of upper-bound trendline resistance and the 76.4% extension at 9525.

The greenback fell against all of the component currencies save the Aussie which fell by 0.22% on the session. Highlighting the performance chart is a 0.84% advance in the euro and a 0.79% gain in the sterling. The dollar losses come on the back of a shift in risk sentiment as traders shed haven plays in favor of yields. However, the return to risk may be short-lived ahead of Friday’s much anticipated non-farm payroll report and although today’s stronger than expected ADP print was well received, market participants continue to factor in weaker employment with consensus estimates calling for a print of 85K. With expectations for further weakness in the employment sector so widespread, risk for Friday’s NFP is to the upside as a stronger than expected print could see a significant pick-up in risk appetite.

Thursday's economic docket is relatively light ahead of the jobs report. Overnight traders will be closely eyeing interest rate decisions from the Bank of England and the European Central Bank. And while both are widely expected to leave rates unchanged, investors will be lending a keen ear to comments made by ECB President Jean-Claude Trichet for a glimpse into the central banks growth outlook. As concerns of a global slowdown continue to take root, markets will be increasingly vulnerable to weaker projections as the recovery continues to see sluggish growth across the globe.

Michael Boutros, Currency Analyst for DailyFX.com is a Technical/Fundamental Analyst specializing in the FX markets. E-mail: mboutros@fxcm.com.

Twitter: @MBForex
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About the Author
Michael Boutros Michael Boutros, Currency Analyst for DailyFX.com is a Technical/Fundamental Analyst specializing in the FX markets. E-mail: mboutros@fxcm.com.
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