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Forexpros.com Daily Analysis - 07/07/2011

Dollar Index Pares Losses As Liquidity Returns

The dollar index had a bullish up day yesterday following 6 consecutive bearish candles. This bullish candle formed as liquidity returned to the market following the US holiday on the 4th July. A small correction is looking overdue and risk sentiment will potentially determine whether this move has legs or not. Moody’s downgrade of Portugal’s credit rating is the latest news relating to the Euro debt crisis.

The Euro is the primary driver for this “basket” of currencies and a failure of price to hold above the key 1.4500 psychological level and descending trend line resistance will encourage EUR/USD bears. However, the bullish engulfing bar printed week ending 3/7/11 is not invalidated until the candle low has been penetrated; further demand could be seen as price moves near the swing low of this candle.

The dollar index could possibly range between the 72.69 and 76.36 levels but the longer term trend points towards a breakout of this range to the downside being the most probable scenario - if we are to believe that the trend is our friend.

Initial event risk comes as the ISM Non-Manufacturing PMI is released today with further potential for volatility coming on Friday with the US Non-Farm Employment report.

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