With Europe out on holiday today the focus in on the US. The dollar has been fairly quiet so far this morning after yesterday’s sharp selloff, but the longer term outlook still looks fairly bleak as investors have once again got the taste to ditch the dollar. The fundamental reasons to sell the dollar are compelling: the Chicago PMI reading released yesterday was the weakest since September 2009, inflation is low and the prospect of prolonged QE from the Fed are all weighing on the greenback. This has pushed Treasury yields back to their lowest levels since the end of 2012. Since yield is one of the key drivers of FX, without Treasury yields stabilising or moving higher, it is hard to see how the dollar can stage a meaningful rally.


From a technical perspective the writing was on the wall from Friday when the dollar index broke through the 50-day sma at 82.45. This was followed by a break below 81.70 – the low from mid-April – yesterday. We are pausing around this level on Wednesday morning as the market weighs up what to do next and waits for the FOMC meeting later this evening. Essentially the Fed is likely to acknowledge that 1, the economic data has been disappointing of late and 2, job growth is still too weak, which is all supportive of staying the course with QE3. We wouldn’t be surprised if the Fed turns more cautious on the timing of tapering QE purchases, as it worries about withdrawing stimulus too early. Any sign that the end of QE is off the table for now could see the dollar index plunge further, support lies at 81.15 then at 80.90 – the 100-day and 200-day moving averages respectively. The announcement of the FOMC meeting is 1900 BST, there is no press conference this month, so traders will have to look out for the Fed’s statement instead.


Levels to Watch in the dollar index:


Support:


1, 81.55 – below here is a ST bearish development


2, 81.15 – 100-day sma


3, 81.90 – 200-day sma


Resistance:


1, 81.75 – recent low


2, 82.10


3, 82.45 – 50-days sma


Source: Forex.com and Bloomberg