The greenback pared some of the gains seen earlier in the month Wednesday with the Dow Jones FXCM Dollar Index (Ticker: USDollar) sliding 0.70% on the session. The losses come on back of a stellar performance in US equities that saw the Dow, the S&P, and the NASDAQ surge 2.47%, 2.86%, and 3.04% at the close of trade in New York. The pickup in risk appetite lacked conviction, however, with volume remaining rather subdued ahead of key interest rate decisions out of the ECB and the BoE overnight. All eyes remain fixated on the ongoing sovereign debt saga unfolding in Europe after Germany secured support for further contributions to the EFSF fund when the courts rejected challenges to the nation’s participation in the rescue package. And although the courts did vote in support of the funding mechanism, a ruling was passed that requires a parliamentary budgetary committee to approve future decisions which in turn could make it more difficult for the regions most indebted periphery nations to receive aid.
The dollar closed just above the 50% Fibonacci extension taken from the June 8th and December 1st 2010 crests at 9563, with a crucial hold here needed to avert further dollar weakness. If the risk appetite continues to gather pace, the dollar is likely to fall further, with a break eyeing longer term support at 9455. Daily RSI would need to see a move above the 60-level for further topside moves beyond the 9560 threshold.
The index broke back below the 61.8% Fibonacci extension taken from the July 12th and August 8th crests at 9600 early in the US session before rebounding off the 50% extension at 9560. Interim resistance holds at the figure with subsequent targets eyed at the 76.4% extension at 9650, 9700, and the 100% Fibonacci extension at 9740. Relative strength looks like it may find support at the 40-level which it has been unable to dip below since the start of the month. A downside break eyes support targets at 9560 backed by 38.2% extension at 9515 and 9465.
The greenback fell against all four component currencies, highlighted by a 1.54% decline against the aussie dollar which moved more than 125% of its daily average true range. As noted in Wednesday's Winners/Losers report, the aussie remained well supported throughout North American trade after GDP data overnight showed the continent-nation’s economy grew at a faster pace than expected with a print of 1.2% q/q, topping estimates calling for a read of just 1.0% q/q. The data pushed back expectations that the RBA will need to cut rates with Credit Suisse overnight swaps now factoring in 117 basis points in cuts over the next twelve months, down from nearly 132 basis points just yesterday. Accordingly, the high yielding aussie looks to remain well supported as risk appetite picks up mid-week. The sterling remained rather subdued in North American trade with traders eagerly anticipating the BoE rate decision overnight. The pound saw the smallest gains against the weaker greenback, advancing just 0.23% on the session.
Thursday's economic docket is highlighted by the July trade balance and consumer credit reports and weekly jobless claims. Trade balance figures are expected to see a slight tightening in the deficit with consensus estimates calling for a print of -$51.0B, down from a previous read of -$53.1B. Consumer credit is expected to print at $6.0B, down from $15.5B a month earlier while weekly jobless claims are seen holding above the 400K mark for a fourth consecutive week. With the recent rally in risk lacking conviction on account of dismal volume which hit its lowest levels since August 29th, dollar price action will again be determined by broader market sentiment. It’s also worth noting that as some Fed members continue to up the rhetoric with regards to the ‘need’ for additional stimulus to support the ailed economy, the greenback may come under increased pressure if the central bank announces any plans to embark on further easing policies.
Michael Boutros, Currency Analyst for DailyFX.com is a Technical/Fundamental Analyst specializing in the FX markets. E-mail: mboutros@fxcm.com.
Twitter: @MBForex
WEB: www.fxcm.com
