USD Advances Ahead Of BoE, ECB- Index Poised For Further Gains

By Michael Boutros, Currency Strategist

The greenback snapped a two-day losing streak in North American trade with the Dow Jones FXCM Dollar Index advancing 0.39% on the session. Equity markets were sharply off at the open, spending the majority of the day paring early losses with the major indices mixed at the close of trade in New York. The NASDAQ managed to eke out a gain of just 0.31% with the S&P closing virtually flat on the session. The Dow was not able to stay afloat, closing off by a mere 0.10%. The release of the Fed’s Beige Book today offered an upbeat assessment of the twelve Federal Reserve Districts with the report citing that growth was, “modest to moderate” across most of the nation with price pressures remaining “quite limited” as manufacturing maintained its expansion. The statement went on to note that while farming and mining showed “general robust conditions,” wage increases were “modest overall” while permanent hiring remained “limited.” The remarks were more or less in line with recent relevant data and continue to suggest the domestic recovery remains on proper footing. As data continues to improve, look for the dollar to start reacting favorably on positive US headlines as the greenback slowly decouples from its inverse relationship with equities, a phenomena that is likely to become more prominent later this year.

The dollar reboundedoff key Fibonacci support at the 61.8% extension taken from theAugust 1st and October 27th troughs at 9950 ascited in yesterday’s report. The daily relativestrength index has reversed course and is now testing RSIresistance taken from the December 14th high. A breach of thislevel eyes subsequent targets at the secondary RSI resistance level(dashed line) with the index eyeing the 76.4% extension at10,070.

An hourly chart showsthe index closing back above the psychological 10,000 level afterrebounding off soft resistance at 10,020. A breach here eyestrendline resistance dating back to the December 14th high currently at10,040, and the 76.4% extension at 10,070. This level remainsparamount for the dollar after failing four breach attempts latelast year. A break below interim support eyes subsequent floors at9980, the 61.8% extension at 9950, and 9912. Our bullish bias onthe dollar remains intact so long as the index holds above the9950.

The greenback advancedagainst all four component currencies highlighted by a 1.05%advance against the British pound. Weaker than expected tradebalance data out of the UK slammed the sterling today with thepound falling against all its major counterparts ahead of the BoEinterest rate decision tomorrow. Although the central bank iswidely expected to hold rates at 0.50%, investors will be lookingto see if the MPC cites any increase in the £275B assetpurchase program as conditions in Europe deteriorate and domesticgrowth remains stubbornly sluggish. The top performer of the lotwas the Australian dollar which fell just 0.06% on the session. Aswe have seen over the past couple of days, the close of Europeantrade has triggered a rally in risk with equities advancing intothe close. Accordingly the aussie pared much of the decline seenearlier in the session with the AUD/USD pair cl! osing ju st above the1.03-figure. For detailed scalp levels on the aussie referto yesterday’s scalp report.

Tomorrow economic docket is highlighted by the advanced retail sales report with consensus estimates calling for the pace of sales growth to hold at 0.20% for the month of December. November Business inventories are out soon after with expectations calling for a print of 0.40%, down from a previous read of 0.80%. Despite the nature of the data, the ECB and BoE rate decisions present the highest level of event risk for the day as all eyes turn back on Europe. Traders will be lending keen ear to remarks made by central bank president Mario Draghi with speculation that the ECB will look to adopt the Feds zero interest rate policy continuing to take root after the ECB revealed a balance sheet of over €2 trillion. Look for the dollar to benefit should president Draghi cite an increasingly dovish tone, with the euro risking substantial losses if officials unanimously agree to move more aggressively on rates in an attempt to ease conditions and skirt a so called “mild recession” in the region.

Upcoming Events

Importance

Date	GMT	Release	Expected	Prior
1/12	13:30	HIGH	Advance Retail Sales	0.20%	0.20%
1/12	13:30	MEDIUM	Retail Sales Less Autos	0.30%	0.20%
1/12	13:30	MEDIUM	Retail Sales Ex Auto & Gas	0.30%	0.20%
1/12	13:30	LOW	Retail Sales "Control Group"	0.3%	! 0.20%
1/12	13:30	LOW	Initial Jobless Claims	375K	372K
1/12	13:30	LOW	Continuing Claims	3595K	3595K
1/12	15:00	MEDIUM	Business Inventories	0.40%	0.80%
! 1/12	19:00	MEDIUM	Monthly Budget Statement	-$83.7B	-78.1B

--- Writtenby Michael Boutros, Currency Analyst with DailyFX.com

Tocontact Michael email mboutros@dailyfx.comor followhim on Twitter @MBForex.

Tobe addedto Michael’s email distribution list, send an email withsubject line “Distribution List” to mboutros@dailyfx.com

DailyFX is the forex news and research arm of FXCM, Inc (NYSE: F! XCM), wh ich provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/us_dollar_index/usd_trading_today/2012/01/11/USD_Advances_Ahead_of_BoE_ECB-_Index_Poised_for_Further_Gains.html

>To order reprints of this article, click here: Reprints