U.S. Dollar Index Searches For Support, Sterling Weakness Ahead

The U.S. dollar struggled to hold its ground during the North American session and the greenback may trade heavy over the near-term as the Federal Reserve maintains a cautious outlook for the world’s largest economy. The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.3% lower on the day after falling back from a high of 9505.95, but the sharp pullback may gather pace over the next 24-hours of trading as the USD trades within a downward trending channel. However, should the relative strength index hold above 30, we may see the index hold near-term support around 9450.00, and a correction may unfold during the overnight trade, which could push the index towards the upper bound of its current range around 9500.00.

In light of the recent comments by Atlanta Fed President Dennis Lockhart, it seems as though the central bank is keeping the door open to expand monetary policy further should the risk for a double-dip recession materialize, but it seems as though the FOMC will preserve a wait-and-see approach throughout the remainder of the year as policy makers expect to see a resumption in growth. However, the slowing recovery could force the Fed to keep its exit strategy on hold for an extended period of time, and we may see Chairman Ben Bernanke endorse a zero interest rate policy throughout 2012 as the central bank aims to stimulate the ailing economy. As the dollar index continues to mark lower highs, it seems as though the we will see the downward trend carry into the following year, and the bearish sentiment underling the greenback may gather pace over the near-term as the central bank curbs its outlook for the world’s largest economy.

Two of the four components advanced against the greenback on Tuesday, led by a 0.19% rally in the British Pound, but the recent strength in the British Pound could be short-lived as the Bank of England maintains a dovish outlook for monetary policy. With the meeting minutes on tap for later tonight, the policy statement could highlight an increased risk of undershooting the 2% target for inflation, and the central bank may show a greater willingness to expand policy further in order to combat the slowing recovery in the U.K. Should we see a growing shift within the Monetary Policy Committee, speculation for a additional asset purchases is likely to spark a bearish reaction in the sterling, and the GBP/USD may give back the advance carried over from the previous week as interest rate expectations falter.