USD to Take Cues from Fed Rhetoric- Larger AUD Correction on Tap

Talking Points:

- USDOLLAR Struggling to Maintain Bullish Momentum; RSI in Focus

- Larger Australian Dollar Correction on Tap; Lower High on Horizon?

USDOLLAR Daily

Chart – Created Using FXCM Marketscope 2.0

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  Bullish Bias at Risk on Close Below 10,657 (61.8 expansion)
  


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  Downside Break in Relative Strength Index to Highlight Downside Targets
  


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  Interim Resistance: 10,753 (23.6 expansion) to 10,759 (61.8 retracement)
  


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  Interim Support: 10,657 (61.8 extension)- Closing Basis
  

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) extended the decline from the previous week as the data prints fell short of market expectations, and the greenback may weaken further going into the New Year as the Relative Strength Index struggles to maintain the bullish momentum carried over from back in October.

If the bearish break in the RSI continues to take shape, price should follow as it threatens trendline support, and a close below 10,657 (61.8 expansion) would highlight the downside targets for the USDOLLAR as it fails to retrace the decline from back in September.

Nevertheless, with Fed officials scheduled to speak at the American Economic Association’s (AEA) 2014 Annual Meeting later this week, the fresh batch of central bank rhetoric may help limit the downside risk for the greenback should the group adopt a less dovish tone for monetary policy, but the Federal Open Market Committee (FOMC) may stick to the sidelines at the January 29 meeting amid the growing threats for disinflation.

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AUDUSD Daily

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  Bullish RSI Break to Generate Larger Correction; Looking for Lower High
  


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  Interim Resistance: 0.8990 Pivot to 0.9000 (38.2 expansion)
  


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  Interim Support: 0.8780 (78.6 expansion) to 0.8800 Pivot
  

All four components rallied against the greenback, led by a 0.61 percent advance in the Australian dollar, and the AUDUSD may face a larger correction in the coming days as it threatens the bearish momentum dating back to November.

With that said, a lower high may take shape in January as the pair carves a lower low ahead of 2014, and the long-term bearish trend should continue to take shape next year as the Reserve Bank of Australia (RBA) retains a dovish tone for monetary policy.

In turn, former support around 0.8990 to 0.9000 (38.2 percent Fibonacci expansion) will be largely in focus during the rebound, and we will continue to sell bounces in the exchange rate as the fundamentals and technicals favor the downside.

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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USD to Take Cues from Fed Rhetoric- Larger AUD Correction on Tap