The greenback was weaker across the board at the close of North American trade on Wednesday with the Dow Jones FXCM Dollar Index (Ticker: US Dollar) off a more than 0.50% on the session. The losses come on the back of a lackluster performance in US equities that saw the Dow and the S&P close marginally higher by 0.4% and 0.9% respectively. Although a late day rally saw the two indices close higher on the session, the NASDAQ remained under pressure, closing lower by nearly 0.50%. While stock markets struggle to find firm footing after last week’s massive swings, currencies have seemingly gone back on the offensive with risk trades continuing to support higher-yielding growth backed currencies.
The dollar has remained under pressure despite losses in the equity markets as uncertainty about future Fed policy continues to see a dampening in the demand for the reserve currency. Underlying the concerns are conflicting remarks made by central bank member who continue to voice their descent of the Fed’s august 9th decision to keep interest rates at record lows through mid-2013. Philadelphia Fed President Charles Plosser and Dallas Fed Chief Richard Fisher have both expressed concerns that the Fed’s actions have signaled to market participants that the central bank is in the, ”business of supporting the stock market,” and that the enacted policies would not help spur growth. With such dissention among policy makers, confidence that the economic recovery is on proper footing continues to waver with the dollar suffering on account of haven flows seeking refuge elsewhere. And with Tuesday's growth forecast downgrade from rating agency Standard and Poor’s, uncertainty regarding the outlook for the domestic economy continues to gain steam.
The index continues to trade within a well defined descending channel formation after breaking below the 50% Fibonacci extension taken from the July 7th and August 8th crests at 9460. With RSI signaling oversold conditions here, it’s likely the greenback will rebound off the 61.8% Fibonacci extension where interim support now rests. Topside resistance is eyed back at the 9460 level, with a breech of trendline resistance targeting the 38.2% extension at 9515. A break below 9400 sees downside targets at 9370 with subsequent floors eyed at the 76.4% extension at 9345 and the 2010 low at 9321.
The dollar fell against all the component currencies, highlighted by a 0.61% decline against the aussie which continued to benefit from improving risk appetite. As trader’s go back on the hunt for yields, the high yielding Australian dollar will continue to benefit from risk flows. The euro saw the smallest advance against the greenback as investors remain uncertain about the details of the proposed ‘integration’ plans cited yesterday by German Chancellor Angela Merkel and French President Nicolas Sarkozy. Accordingly the euro may continue to linger at these levels after testing the 1.45-figure early in the session.
Today's economic docket sees a flurry of data highlighted by the July consumer price index, leading indicators, and existing home sales. Consensus estimates call for inflation to ease to 3.3% y/y, from a previous print of 3.6% y/y, while core inflation (ex food & energy) is expected to climb to 1.7% y/y, from 1.6% y/y. Investors will be closely eyeing the existing home sales report for an update on the ailed housing sector, with estimates calling for sales to rise by 2.7% m/m from a previous contraction of 0.8% m/m in June. With ongoing concerns about the health of the domestic recovery coming into question, weaker than expected prints tomorrow could weigh heavily on investor sentiment as investors seek to quarantine themselves from a possible slide back into recession.
Michael Boutros, Currency Analyst for DailyFX.com is a Technical/Fundamental Analyst specializing in the FX markets. E-mail: firstname.lastname@example.org.