USD Rally To Accelerate On FOMC, AUD Outlook Weighed By RBA Policy

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.48 percent higher from the open amid the positive developments from earlier this morning, and the reserve currency may continue to recoup the losses from earlier this month as the fresh batch of data dampens the scope of seeing another large-scale asset purchase program. As the index carves out a short-term floor around the 9,980 figure, we should see the rebound gather pace in the days ahead, but the dollar may face a small pullback before we see a move higher as the 30-minute relative strength index falls back from a high of 76. In turn, we may see the dollar test interim resistance around the 10,050 figure for support, and we will maintain a bullish outlook for the greenback as the upward trend from earlier this year continues to take shape.

With FOMC Minutes on tap for the following week, the fresh batch of central bank rhetoric may fuel the short-term rally in the USD should the Fed strike an improved outlook for the region. As central bank officials see the recovery gradually gathering pace over the coming months, the committee may continue to soften its dovish tone for monetary, and it seems as though the Fed is slowly moving away from its exit strategy as the economy gets on a more sustainable path. As the USDOOLLAR continues to come off of trendline support, we may see the greenback threaten the downward trending channel from June, and the dollar could be setting up for a bullish breakout as the relative strength index maintains the upward trend from earlier this year. As speculation for QE3 dissipate, the dollar may continue to strength ahead of the Fed’s Jackson Hole conference scheduled for the end of the month, and the meeting may spark a sharp rally in the dollar should Chairman Ben Bernanke curb bets for additional monetary support.

The dollar rallied across the board on Friday, led by a 0.84 percent decline in the Australian dollar, and the high-yielding currency may come under increased pressure next week should the Reserve Bank of Australia show a greater willingness to lower the benchmark interest rate further. Indeed, the RBA Minutes on tap for the August 20 highlights the biggest event risk for the aussie, and we may see the central bank sound more dovish this time around as the developments coming out of China – Australia’s largest trading partner – continue to fuel fears of a ‘hard landing.’ As the AUDUSD fails to maintain the upward trending channel from June, heightening speculation for another rate cut may fuel a sharp selloff in the exchange rate, and we will maintain a bearish outlook for the pair as it carves out lower high around the 1.0600 figure.

--- Written by David Song, Currency Analyst

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

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