By David Song, Currency Analyst 25 August 2011 15:10 GMT 
DJ FXCM Dollar Index
The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.46% higher from the open after moving 69% of its average true range, and the greenback may continue to appreciate throughout the North American trade as market participants scale back their appetite for yields. As the economic docket remains pretty bare for the remainder of the day, risk sentiment should heavily influence the USD, but the reserve currency looks poised to consolidate going into the end of the week as the relative strength index approaches overbought territory. In turn, the break above the upper bounds of the Bollinger Band is likely to be short-lived, but comments from Fed Chairman Ben Bernanke likes to heavily influence future price action for the USD as investors weigh outlook for monetary policy. 
Indeed, there’s speculation that Mr. Bernanke will hint at another round of quantitative easing, but we expect the central bank head to stay on the sidelines and go into greater detail about the interest rate decision announced earlier this month. The lack of assurance for additional monetary stimulus is likely to weigh on investor confidence, and the rise in risk aversion may gather pace as the fundamental outlook for the world’s largest economy remains clouded with high uncertainty. Although the U.S. faces a tepid recovery, Fed officials still see economic activity gathering pace in the coming months, and there could be a growing rift within the FOMC as price pressures emerge. The stickiness in price growth is likely to become a growing concern for the committee as it saps purchasing power for Americans. As a result, the majority may abandon its pledge to carry the zero interest rate policy well into 2013, and the near-term rebound in the USD may gather pace as investors scale back expectations for additional monetary stimulus. Despite the recent rally in the dollar index, we need to see price action clear the 50.0% Fib (9543) as well as the 78.6% Fib (9670) for the greenback to threaten the downward trend, but the strong correlation with risk is likely to stand as long as the Fed pledges to keep the benchmark interest rate at the record-low for an extended period of time. 
All four components weakened against the USD for the second-day, led by a 0.58% decline in the British Pound, and the sterling may continue to give back the advance from earlier this month as the Bank of England keeps the door open to expand monetary policy further. Indeed, BoE board member Martin Weale floated the idea that the Monetary Policy Committee will do whatever is need to support the ailing economy, and the central bank may show an increased willingness to expand its asset purchase program beyond the GBP 200B target as the region faces a risk for a double-dip recession. In turn, there could be a growing shift within the MPC, and Governor Mervyn King may show an increased willingness to expand monetary policy further as the central bank continue to see a risk of undershooting the 2 percent inflation target. In turn, the near-term correction in the GBP/USD should gather pace, and the exchange rate may make another run at the 200-Day SMA (1.6103) as it retraces the rebound from 1.6110. Join us to discuss the outlook for the major currencies on the DailyFXForums To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com DailyFX provides forex news on the economic reports and political events that influence the currency market.
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