Daily Report: Dollar Weakens Ahead of FOMC, Vulnerable to a New Low

Dollar continues to edge lower against major currencies as traders are preparing for the highly anticipated FOMC statement. Yesterday's two year treasury auction was quite well received, drew 3.19 times bids for $40b 2 year note. The Treasury will also auction five-year notes and seven-year securities tomorrow, totally a record $104b this week. Recent development dampens the immediate dollar bullish case. As noted yesterday, the breakout of a falling wedge pattern in EUR/USD argues that 1.4337 is not the top yet. GBP/USD also hold well above near term support of 1.6185 while AUD/USD failed to sustain below 0.7826 support. The greenback looks vulnerable to a new low.

Although economic outlook has improved as suggested by recent indicators, Fed is widely expected to keep interest rates unchanged at 0-0.25% for the rest the year. In light of recent speculations of earlier rate hike, we believe the Fed will reinforce its stance that interest rates will remain low at an extremely long period of time. Moreover, we forecast the Fed will keep the asset buying program as what it is but compositions of asset types should be given more flexibility. Before that, markets will also pay attention to durable goods orders and new home sales from US as well as speech from SNB Roth and BoE King.

One thing to note is that risk appetite seems not to be the driving force behind the sharp fall in dollar yesterday. DOW indeed closed slightly lower by -16pts while S&P 500 rose a mere 2pts. Crude oil recovered but remains pressured under 70 level while gold recovery was also limited by 930 level. However, strength in EUR/AUD and EUR/CAD are quite impressive this week and the crosses both jumped over 2% so far. Looking at the following chart, it's indeed quite clear that EUR/CAD has bottomed out at 1.5343. The markets might indeed still be in risk averse mode but this time, funds are flowing our of high risk assets into Euro instead of dollar and yen. The possibility of emergence of this pattern worth some attention.

Looking at the dollar index, while the it's still holding above 79.19 support, the bullish outlook is somewhat shaky considering the developments in EUR/USD, GBP/USD and AUD/USD. We'll turn neutral for the moment. On the downside, below 79.19 will starts to argue that decline from 89.62 is not finished and a new low below 78.33 could be seen. But downside potential should be limited as 77.69 key support is expected to hold. On the upside, above 80.94 will reaffirm the bullish case that 78.33 is the bottom and should set the stage for further rise to next key resistance at 82.62 (38.2% retracement of 89.62 to 78.93 at 82.64).

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.6283; (P) 1.6378; (R1) 1.6547; More

While GBP/USD is still bounded in range of 1.6185/6617, the corrective structure of price actions from 1.6617 continues to argue that it's merely consolidations only. In other words, GBP/USD has not topped out yet. A break above 1.6617/6661 resistance zone will indicate that whole rise from 1.3654 has resumed, targeting 61.8% projection of 1.4395 to 1.6661 from 1.5801 at 1.7201. But after all, we'd expect upside momentum to diminish as GBP/USD approaches this level and bring reversal finally. On the downside, below 1.6185 will turn focus back to 1.5801 support first.

In the bigger picture, rise from 1.3654 is treated as the third leg of the correction that started at 1.3503, which correct the larger down trend from 2.1161. Such rally from 1.3654 should be in the last stage after meeting target zone of 1.6428/7332 (38.2% and 50% retracement of 2.1161 to 1.3503). Focus will remain on reversal signal as we'd expect the whole correction from 1.3503 to conclude here. On the downside, firm break of 1.5801 support will now be an important signal that the whole correction has finally completed and will turn focus to next key support of 1.4984 for confirmation.

Economic Indicators Update

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