The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) added another 0.30 percent on Tuesday as the upward trending channel continues to take shape, and we may see the greenback appreciate further over the remainder of the week as the flight to safety gathers pace. As the 30-minute relative strength index pushes deeper into overbought territory, the dollar may continue to gain ground throughout the North American trade, but we should see a short-term pullback once the oscillator falls back below 70. As market participants turn their attention to the FOMC Minutes on tap for Wednesday, we may see the dollar consolidate going into the middle of the week, but the fresh batch of central bank rhetoric may prop up the greenback should the committee continue to talk down speculation for another large-scale asset purchase program. 
The upward trend in the USDOLLAR paired with the rise in the relative strength index reinforces a bullish outlook for the reserve currency, and the index looks poised to mark a run at the 78.6 percent Fibonacci retracement around 10,118 as the fundamental outlook for the world’s largest economy continues to improve. Indeed, the FOMC may sound more hawkish this time around amid the resilience in private consumption along with the stickiness in price growth, and we should see the central bank move away from its easing cycle as the recovery gradually gathers pace. However, Fed Chairman Ben Bernanke may keep the door open to expand the balance sheet further as ongoing turmoil in the global financial system continues to pose a risk to for the world economy, and we may see a growing rift within the committee as central bank officials expect to see a stronger recovery in the second-half of the year. In turn, we may see market participants increase bets for a rate hike, and the dollar should track higher going into the second-half of the year as we expect the FOMC to lay out a tentative exit strategy in the coming months. 
Three of the four components weakened against the greenback, led by a 0.46 percent decline in the Euro, while the British Pound shed 0.44 percent as market participants scaled back their appetite for risk. Indeed, the sterling may face additional headwinds over the next 24-hours of trading as market participants see the Bank of England lowering its growth forecast for the U.K. while keeping the door open to expand its balance sheet further, but we expect to see the central bank target the stickiness in underlying inflation as its price-stability mandate remains under scrutiny. As BoE officials anticipate to see a more robust recovery in the second-half of 2012, the MPC may shift gears at the turn of the year, and we may see the central bank start to discuss withdrawing monetary support as policy makers no longer see a risk of undershooting the 2 percent target for inflation. In turn, we should see the upward trend in the GBPUSD continue to take shape, and we are looking for fresh yearly highs in the exchange rate as the committee looks to conclude its easing cycle. --- Written by David Song, Currency Analyst To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com. Join us to discuss the outlook for the major currencies on the DailyFX Forums DailyFX provides forex news on the economic reports and political events that influence the currency market.
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The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) remains 0.10 higher from the open after move 67 percent of its average true range, and the greenback should continue to retrace the decline from the previous month as the upward trending channel gathers pace. As the above-forecast the U. of Michigan consumer confidence survey raises the outlook for growth, easing bets for another round of quantitative easing should continue to prop up the dollar, but we may see the reserve currency hold steady throughout the North American trade as the relative strength index comes off of overbought territory. Although the economic docket for the following week is expected to show the headline reading for inflation falling back to an annualized rate of 2.4% in April, the stickiness in underlying price growth may encourage the FOMC to drop its dovish tone for monetary policy, and we may see the central bank start to discuss a tentative exit strategy as the recovery gradually gathers pace. 
Indeed, the FOMC Minutes highlight the biggest event risk for the following week, and the central bank may sound more hawkish this time around as the outlook for growth and inflation picks up. At the same time, we may see a growing rift within the committee as Fed Chairman Ben Bernanke leaves the door open to expand the balance sheet further, and the central bank may mull the 2014 pledge for its zero interest rate policy as the economy gets on a more sustainable path. As the Fed moves away from its easing cycle, we should see the bullish trend in the USDOLLAR continue to take shape, and we may see the index make another run at the 78.6 percent Fibonacci retracement around 10,118 should the central bank see scope to start normalizing monetary policy later this year. As the RSI maintains the upward trend from the beginning of the month, the dollar should continue to track higher in the coming days, but we may see a short-term correction ahead of June as the ascending triangle formation remains in play. 
Two of the four components weakened against the greenback, led by a 0.33 percent decline in the British Pound, but the sterling may regain its footing next week should the Bank of England strike an improved outlook for the U.K. As the quarterly inflation comes into focus, we may see the BoE adopt a hawkish outlook for monetary policy amid the stickiness in underlying price growth, and the central bank may see scope to raise the benchmark interest rate off of the record-low as policy makers anticipate to see a faster recovery in the second-half of the year. However, as Britain slips back into recession, there’s speculation that the BoE will stick to its wait-and-see approach as the ongoing turmoil in the euro-area – the U.K.’s largest trading partner – dampens the prospects for future growth. In turn, we may see the GBPUSD continue to give back the advance from the previous month, but we should see former resistance around 1.6000 act as new support as the pair maintains the upward trend from earlier this year. --- Written by David Song, Currency Analyst To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com. Join us to discuss the outlook for the major currencies on the DailyFX Forums