FOREX ANALYSIS

Updated Apr 6, 2011 5:55:00 PM

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The USD has been the whipping boy in FX as widening relative yield differentials have punished the greenback. Interest rate decisions from the ECB and BoE are set for release Thursday - market participants have priced in a 25bp hike from the ECB while no hike is expected out of the BoE just yet. Conversely, yesterday’s FOMC minutes revealed a widening ‘policy direction’ distribution between policy makers which doesn’t bode well  for a Fed that is already viewed as being behind the ‘anchoring inflation expectations’ curve. Such a view has been a huge topic of debate and will remain to be so until U.S. monetary policy direction is set in stone. While the Fed sorts out its internal dissention, FX is likely to remain driven by yield differentials which at the moment is not in the dollar’s favor with the exception being against the yen.

The technical picture confirms the fundamental trend of widening yield differentials. A number of technical developments suggest the buck may continue to underperform:

USD Index: Breakouts – Downside for the USD Index has been defined by short term bearish consolidation breakouts on the decline from the 88.00 level. The most recent break below bear flag support targets a measured move objective below the key 75.00 level and may spell further despair for USD longs.

XAU/USD: Inverted H&S – Wednesday’s daily close above the $1450 mark completed a move above an inverted H&S neckline which has a measured move objective towards the $1575 level. With inverse gold/USD correlations returning to form as of late, a move of this extent in gold would not be a good sign for the buck.

EUR/USD, GBP/USD: Primary trend reversal? – Both pairs have closed above the trendlines for their respective primary downtrends suggesting reversals may be in store.

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Daniel Hwang | Senior Currency Strategist