USD Outlook Remains Bullish On FOMC, Euro Bearish Formation In Focus

•  U.S. Dollar: Fed To Maintain Current Policy, Soften Dovish Tone
•  Euro: Spain, Italy Face Rising Finance Costs - Descending Triangle Remains In Play
•  British Pound: Hits Fresh Yearly High Ahead Of 1Q U.K. GDP

U.S. Dollar: Fed To Maintain Current Policy, Soften Dovish Tone

The greenback is coming under pressure ahead of the FOMC interest rate decision, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)giving back the overnight advance to 9,947, but the rate decision on tap for tomorrow may prop up reserve currency as the committee moves away from its easing cycle. Although the FOMC is widely expected to maintain its current policy in April, the fresh batch of central bank rhetoric paired with the updated forecast for growth and inflation may reinforce our bullish call for the USD as Fed officials take note of the more robust recovery.

In turn, we may see the committee start to discuss a tentative exit strategy as fundamental outlook for the U.S. picks up, but Fed Chairman Ben Bernanke may keep the door open to expand policy further as the sovereign debt crisis continues to pose a threat to the world financial system. Nevertheless, as the Fed switches gears, the shift in the policy outlook should drive the greenback higher in 2012, and we should see the bullish formation on the USDOLLAR continue to take shape as it carves out a higher low around 9,900. As a result, we're still expecting to see another run at the 78.6% Fibonacci retracement around 10,118, and the fundamentals coming out of the world's largest economy should have a greater impact in driving price action as the Fed looks to conclude its zero interest rate policy.

Euro: Spain, Italy Face Rising Finance Costs - Descending Triangle Remains In Play

The Euro advanced to 1.3190 amid the rise in risk-taking behavior, but the rebound is likely to be short-lived as heightening financing costs across the European periphery raises the threat for contagion. Indeed, the yield tied to Spain and Italy's debt continued to push higher as the governments tapped the bond market overnight, and the ongoing turmoil in the region continues to instill a weakened outlook for the EURUSD as European policy makers fail to restore investor confidence. As the governments operating under the single currency become increasingly reliant on monetary support, the European Central Bank may face increased pressure to expand monetary policy further, but the wait-and-see approach held by the Governing Council may dampen the appeal of the Euro as there appears to be a growing rift within the group. As the bearish formation in the EURUSD continues to pan out, we should see the pair track lower going in May, and the euro-dollar maintains at risk for a sharp selloff as price action approaches the apex of the descending triangle.

British Pound: Hits Fresh Yearly High Ahead Of 1Q U.K. GDP

The British Pound extended the advance from earlier this month, with the GBPUSD rallying to a fresh yearly high of 1.6163, and the sterling may appreciate further over the next 24-hours of trading should the economic docket encourage an improved outlook for the U.K. As the advance 1Q GDP report is expected to show the economy returning to growth, a strong print could spark a run at the 23.6% Fib from the 2009 low to high around 1.6250, and the sterling looks poised to appreciate further in 2012 as the Bank of England looks to conclude its easing cycle. As the GBPUSD maintains the upward trending channel from earlier this year, we expect to see fresh highs going into May, but we will keep a close eye on the relative strength index approaches overbought territory. Nevertheless, we should see former resistance around 1.6000 act as new support as the upward trend in the GBPUSD gathers pace, and the sterling may outperform against its major counterparts throughout the remainder of the year as the shift in the policy outlook props up interest rate expectations.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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