A strong rebound rally in the British Pound is one of the reasons why the March U.S. Dollar Index is trading lower overnight. Early in the trading session, the dollar index got a boost when the Sterling followed through to the downside following negative comments from Bank of England Governor King on Tuesday.
King essentially said that the central bank is considering giving up its 2% inflation target for a nominal GDP target. King also said that he expects the economy to show a decline in the fourth quarter. With this news traders pressed the GBP/USD lower in anticipation of the implementation of additional quantitative easing.
Later in the session, comments from U.K. Prime Minister Cameron triggered a reversal in the British Pound. Cameron’s comments centered on a referendum on EU membership. The rapid rally in the Sterling helped drive the March U.S. Dollar Index lower along with a firm Euro and an improving Japanese Yen.
Technically, the March U.S. Dollar Index is under pressure for a second day after finding resistance inside of a major retracement zone at 80.27. This price essentially landed inside of a retracement zone bounded by 80.20 to 80.39. Although it wasn’t actually tested, a downtrending Gann angle from the 80.99 top is at 80.24. This angle combines with the 50% level today to form a resistance cluster at 80.20 to 80.24.
The dollar index weakened on Tuesday when it failed to hold an uptrending Gann angle from the 79.40 bottom at 80.15 today. This set up the break into another uptrending Gann angle at 79.77. This angle was tested overnight and became short-term support when the market rallied. A failure to hold this level will likely mean a test of 79.59 later in the session.
Based on the short-term range of 79.40 to 80.27, a minor retracement zone has formed at 79.84 to 79.74. This area is currently being tested. Yesterday it held as support so it is possible that buyers are stepping in to prevent a total collapse in the index.
One reason why the March U.S. Dollar Index is holding in a support zone may be because investors feel it will rally if the U.S. debt ceiling talks fall apart. This would trigger a flight to safety move which would send the index soaring. Investors appear to be trying to establish support while they wait out the negotiations.