Dollar enters short-term bearish channel

The greenback was weaker for a second consecutive day at the close of North American trade on Tuesday with the Dow Jones FXCM Dollar Index (Ticker:USDollar) sliding 0.56% on the session. Equity markets continued to rally on hopes that EU finance ministers will be able to find consensus on further fiscal integration to combat the debt crisis and stronger-than-expected US consumer confidence which rose by the most since 2003. Stocks closed well off their highs with the Dow and the S&P posting modest advances of 0.28% and 0.22% respectively, while the NASDAQ lagged with a loss of 0.47%. Gains were tempered as the relief rally continued to lose steam with the recent run-up likely to come under pressure after Bank of America and Citigroup were downgraded by rating agency S&P in aftermarket hours. With Italian yields continuing to hold at record highs, sustainability of the periphery nations is likely to come back into focus with sentiment expected to reverse over the coming days.

The dollar broke back below the 23.6% Fibonacci extension taken from the June 2010 and November 2010 crests at 9970 before rebounding sharply off the 9900 level. Daily relative strength continues to hold above RSI support at 57 with a rebound off this level supporting the argument for a hold above interim support at 9900. A topside cross of the 20- and 50-day moving averages also suggest the dollar may soon reverse its course to pare the losses seen over the past few sessions with our medium-term bias remaining weighted to the topside.

An hourly chart shows the index continuing to trade within the confines of a newly formed descending channel formation. Interim support for the greenback rests at 9900 with subsequent floors seen at the 50% Fibonacci extension taken from the 1st and October 27th troughs at 9850, and 9800. This level remains paramount for the dollar with a break below risking substantial losses for the reserve currency. A breach above channel resistance eyes topside targets at the 10,000 backed by 10,030 and the 76.4% extension at 10,065.

The greenback fell against all four component currencies highlighted by a 1.28% decline against the Australian dollar. The aussie has advanced more than 3.2% this week alone as improved risk appetite saw traders jettison lower yielding assets like the dollar in favor of risk. The rally is likely to taper off here as short-covering gives way to new positioning heading into the close of fourth quarter. The euro was the weakest performer of the lot with a marginal advance of just 0.09%. It comes as no surprise that the single currency has lagged amid the recent rally in risk with traders continuing to pay close attention to developments out of Europe. Both the aussie and the euro are featured in today’s Scalping Report where we’ve mapped out our downside targets in anticipation that the relief rally will falter.

Wednesday’s economic docket is highlighted ADP employment change, pending home sales, and the Fed Beige Book survey. Consensus estimates call for ADP employment to increase by 130K, up from a previous advance of 110K, while pending home sales are expected to show some improvement in the housing sector with a print of 2.0% m/m from a previous decline of 4.6% m/m. Traders will be specifically eyeing the Fed’s beige book for the assessment of the central bank’s 12 districts and its possible impact on Fed policy moving forward. Accordingly the dollar may come under added pressure if the release suggests further weakness in the real economy with expectations for another round of quantitative easing likely to weigh on the greenback. That said, a reversal in the risk rally seen since the start of the week should support the greenback as traders once again seek refuge in the perceived safety of the reserve currency.

Upcoming Events

Date

GMT

Importance

Release

Expected

Prior

11/30

12:30

LOW

Challenger Job Cuts (YoY)

-

12.60%

11/30

13:15

MEDIUM

ADP Employment Change

130K

110K

11/30

13:30

LOW

Non-Farm Productivity

2.60%

3.10%

11/30

13:30

LOW

Unit Labor Costs

-2.10%

-2.40%

11/30

14:45

LOW

Chicago Purchasing Manager

58.50

58.40

11/30

15:00

LOW

Pending Home Sales (MoM)

2.00%

-4.60%

11/30

15:00

MEDIUM

Pending Home Sales (YoY)

-

7.90%

11/30

19:00

HIGH

Fed Releases Beige Book Economic Survey

-

-

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.DailyFX.com

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.

Twitter: @MBForex
WEB: www.DailyFX.com

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