U.S. Markets closed

USD Looks Higher on Bullish Breakout- JPY Elections in Focus

David Song





Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index






Forex_USD_Looks_Higher_on_Bullish_Breakout-_JPY_Elections_in_Focus_body_ScreenShot165.png, USD Looks Higher on Bullish Breakout- JPY Elections in Focus

Chart - Created Using FXCM Marketscope 2.0

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) climbed another 0.49 percent as the Philadelphia Fed survey jumped to 19.8 in July to mark the highest reading since March 2011, and the greenback may continue to track higher over the remainder of the week as it appears to be breaking out of the bearish trend from earlier this month. As the USDOLLAR carves out a near-term base around the 61.8 percent Fibonacci retracement around 10,764, we may see a more meaningful rebound in the days ahead, but we will keep a close eye on the 30-minute relative strength index as it comes up against overbought territory. In turn, a pullback in the index may provide a buying opportunity, and the bullish sentiment surrounding the reserve currency should gather pace in the second-half of the year as the Federal Reserve slowly moves away from its easing cycle.

Forex_USD_Looks_Higher_on_Bullish_Breakout-_JPY_Elections_in_Focus_body_ScreenShot166.png, USD Looks Higher on Bullish Breakout- JPY Elections in Focus

As the bullish flag formation takes shape, we may see the dollar carve out a higher high ahead of the next FOMC interest rate decision on July 31, and we may see a growing number of central bank officials adopt a more neutral to hawkish tone for monetary policy as the economic recovery gradually gathers pace. In turn, we will look for a run at the 23.6 percent retracement around 10,882, and we may see the dollar push to fresh highs as Fed Chairman Ben Bernanke continues to see the asset-purchase program coming to an end in mid-2014. As the FOMC anticipates a stronger recovery in the second-half of the year, a more robust recovery should further the argument to scale back on quantitative easing, and we may see the committee implement its exit strategy ahead of schedule as the world’s largest economy gets on a more sustainable path.

Forex_USD_Looks_Higher_on_Bullish_Breakout-_JPY_Elections_in_Focus_body_ScreenShot167.png, USD Looks Higher on Bullish Breakout- JPY Elections in Focus

Once again, the greenback advanced across the board, driven by a 1.02 percent decline in the Japanese Yen, but the weakness in the low-yielding currency may be short-lived as the elections scheduled for this weekend comes into focus. Indeed, there’s growing speculation that Prime Minister Shinzo Abe will have greater control over the parliament as the Liberal Democratic Party (LDP) looks to gain more seats, and a favorable outcome may trigger a bullish reaction in the Yen as the new government plans to implement constitutional changes for the world’s third-largest economy. Indeed, a shift in policy could heavily impact the exchange rate as Japanese policy makers continue to fight deflation, but a material change in the parliament may keep the Bank of Japan (BoJ) on the sidelines as there appears to be a growing rift within the board. Nevertheless, we’re seeing the USDJPY breakout of the bullish flag pattern as well, but the elections may complicate the trade as Mr. Abe takes a more aggressive approach in addressing the risks surrounding the region.

--- Written by David Song, Currency Analyst

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

To be added to David's e-mail distribution list, please follow this link.

Bring the economic calendar to your charts with the DailyFX News App.

New to FX? Watch this Video

Join us to discuss the outlook for the major currencies on the DailyFXForums

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Learn forex trading with a free practice account and trading charts from FXCM.