A media report last week said the central bank may tweak its forward guidance message to reiterate that interest rates will remain low for an extended period. The dollar was supported for most of the second quarter of this year, as improving economic conditions in the world's largest economy ignited talk that policymakers will start scaling back on a record quantitative easing program sooner than expected. However calls by Fed Chairman Ben Bernanke that accommodative monetary policy was still necessary for the economy have weighed on the buck in recent weeks, as it retreated against a basket of major currencies.
Amid speculation that the Fed will continue to pledge lower rates and go ahead with its record $85 billion-a-month QE program, traders remained wary over selling the greenback aggressively as policymakers were still seen tapering the stimulus program in the coming months, and the dollar halted its slide yesterday.
EUR/USD rose to a five-week high by 1.3297 on Friday, but failed to extend its gains higher at the start of the week and stalled by 1.3294. USD/JPY fell to 97.64 on Monday, but bounced back after hitting key support represented by the 50 percent Fibonacci retracement of the June to July move at 97.68. This level also is characterized by an area of heavy congestion in the latter part of June which is acting as support.
Any dovish comments by the Fed may give scope for the dollar to break through support and extend its five-week low, now by 81.499, against its major peers. The EUR/USD may likely break above its 1.3300 barrier while USD/JPY may drop aggressively below 97.50. However analysts warn that dollar weakness may be short lived, especially if economic data continues to show improvement, and recommendations were to buy back the buck on pullbacks.
IMOH, Clement I.
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