USD Correction To Gather Pace, JPY Threatens Range As BoJ Mulls QE

The greenback struggled to hold its ground on Thursday, with the Dow Jones-FXCM U.S. Dollar Index tagging a low of 9,955, and the reserve currency may continue to consolidate over the remainder of the week as market sentiment improves. 

0.24 percent lower from the open after moving 78 percent of its average true range, and the greenback may continue to give back the advance from earlier this week as it struggles to maintain the upward trending channel from the beginning of the month. As the bearish divergence in the 30-minute relative strength index continues to take shape, the index appears to have carved out a near-term top around the 10,000 figure, and we may see the dollar revert back towards the 9,900 figure as it searches for support. However, as the RSI bounces back from a low of 34, the overnight decline may turn out to be a false break, and we may see the dollar continue to retrace the decline from earlier this year amid the shift in the Fed’s policy outlook.

Indeed, Fed Chairman Ben Bernanke struck an improved outlook for the world’s largest economy amid the significant improvement in private sector credit, and we should see the central bank head continue to soften his dovish tone for monetary policy as the stickiness in underlying price growth raises the risk for inflation. As the broad ascending triangle in the index continues to pan out, the 78.6 percent Fibonacci retracement should hold up as resistance, and we should see the USDOLLAR continue to carve out higher lows as price action approaches the apex of the bullish formation. In turn, the 61.8 percent Fib around 9,949 may now come in as interim support, but the bullish momentum certainly appears to be tapering off as the relative strength index comes off of its high. In turn, we may see the short-term correction continue to play out over the remainder of the week, but we should see greenback hold above the 50.0 Fib at 9,830 as the bullish trend takes shape.

The greenback weakened against three of the four components, led by a 0.60 percent rally in the Australian dollar, while Japanese Yen struggled on Thursday amid the rebound in risk sentiment. Meanwhile, Bank of Japan board member Sayuri Shirai warned that the central bank’s asset purchase program may threaten the stability of the financial markets, and pledged to play close attention to the exchange rate as the marked appreciation in the local currency continues to dampen the scope for an export-led recovery. In turn, BoJ officials may show a greater willingness for another currency intervention, but we may see a growing rift within the central bank as Governor Masaaki Shirakawa continues to utilize the balance sheet as the main policy tool to address the risks surrounding the region.