Dollar drifts as Fed policy holds

The greenback was softer at the close of North American trade on Wednesday with the Dow Jones FXCM Dollar Index (Ticker: USDollar) sliding 0.17% on the session. Equity markets saw a rebound after the sharp declines seen earlier in the week with the Dow, the S&P, and the NASDAQ advancing 1.53%, 1.61%, and 1.27% respectively. Aside from a stronger-than-expected print on the October ADP employment report which topped estimates with a print of 110K private sector jobs, the rally in risk was unsubstantiated with risk currencies seemingly decoupling from the advance. Speculation about the situation in Europe continues to suggest a bleak outlook for the region as investor’s now wait on a Greek referendum on euro membership and the conditions for the newly proposed rescue package. Later in the day German Chancellor Angela Merkel and French President Nicolas Sarkozy held a joint press conference citing stern warnings that Greece would not receive any aid until the referendum has been passed. Risk currencies promptly sold off as markets began to contemplate the possibility of a Greek/Euro decoupling.

Topping Wednesday's headlines was the FOMC interest rate decision where the Fed re-affirmed its pledge to keep interest rates at “exceptionally low levels at least through mid-2013.” In the subsequent press conference, Chairman Ben Bernanke cited that, ”While we still expect that economic activity and labor market conditions will improve gradually over time, the pace of the progress is likely to be frustratingly slow.” The remarks come along side a downgrade in the forecast for economic growth and echoes concerns over the health of both the domestic and global economies. In the following Q&A segment Bernanke noted that although no further easing measures were decided at this time, the central bank remained steadfast and was ready to act should conditions warrant with the resumption of asset purchases still on the table.

The dollar eased back below the 38.2% Fibonacci extension taken from the June 2010 and November 2010 crests at 9745 by the close of trade after paring earlier losses. Notwithstanding any further developments out of Europe, the dollar is likely to continue to consolidate within its recent range as all eyes now turn to key employment data on Friday.

An hourly chart shows the index briefly dipping below the 50% Fibonacci retracement taken from the August 1st advance at 9730 before closing out the session just below 9750. Interim support holds at 9730 backed by 9700 and the 61.8% retracement at 9633. Topside targets are held at 9800 with subsequent ceilings eyed at the 38.2% retracement at 9825, and 9850.

The greenback fell against three of the four component currencies highlighted by a 0.43% decline against the Japanese Yen. Despite the advance, the USD/JPY continues to hold above the 38.2% Fibonacci retracement taken from the move off all-time lows to the peak of the intervention spike. Yen advances are likely to be slow as investors use caution after Sunday’s surprise intervention. The pound was the worst perfumer of the lot, closing virtually flat against a weaker dollar despite moving more than 86% of its daily average true range.

Thursday's economic docket is highlighted by the October ISM non-manufacturing report where estimates are calling for a print of 53.5, up from a previous read of 53.0. Traders will also be eyeing weekly jobless claims ahead of Friday’s encompassing non-farm payroll data.

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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