A confluence of technical and fundamental factors have contributed to Tuesday's decline in the US Dollar Index. Risk aversion began to ease the moment Asian equity markets closed, as downward pressure on equity futures subsided. News that a rating agency could potentially downgrade Uncle Sam's AAA rating if the U.S were to lose it's global reserve status, contributed to the first bout of dollar weakness. As a result, several leading indicators of risk appetite failed at key technical levels. Gold rebounded off a key fibonacci retracement (61.8% of the October low to the February high) and the USD/CAD rejected at the 50-day MA. The EUR/USD & DXY breached their 20-day MA's later in North American trade when ECB Weber's comments squashed any thoughts of additional quantitative easing. Since the past two FOMC's have ignited dollar sell-offs, it is not suprising that foreign currencies have been bid up going into tomorrow's meeting. While a "buy the rumor, sell the fact" scenario could be setting up, if the Fed were to dissappoint the market, there is a substantial chance that risk aversion could re-emerge. In either event, the dollar would clearly benefit. In the meantime, clearing key retracement zones at 1.4110 (EUR/USD's 61.8% retracement) & 79.83 (DXY's 50% retracement) will probably remain tough obstacles, but if cleared then focus shifts to the recent extremes seen at the beginning of June. Only a loss of the EUR/USD's 20-day MA near 1.40 (above 80 for DXY) will shift focus back towards trendline support (now located below 1.39).
