Dollar bears returned to the market with force today as the dollar could not continue its upward momentum.  The greenback fell against every major currency today as investors squared dollar short positions leading into tomorrow's GDP data release.  Much of the dollar selling was a direct result of the latest development in the Quantitative Easing Saga.  Of course, the main market focus is currently on the Federal Reserve, and whether or not the Fed will move forward with QE Round 2 next Wednesday, and if they do, what size it will be.

Today, it was confirmed that the Fed had sent out a survey asking Treasury dealers what their expectations were concerning the size and impact of further asset purchases.  The market did not like this news, and, therefore, the dollar continued to fall during New York trading today.  Some analysts and investors believed that the survey raised issues surrounding the credibility of the Fed's decision-making process.  The purpose of quantitative easing is largely to restore confidence to financial markets and the economy in general.  Consequently, the Fed's survey seems to present the Federal Reserve in way that deems them unsure and lacking confidence concerning how to move forward with this 2nd stimulus package.

Other analysts disagreed, however, stating that the Fed simply wants to make sure they are not going to surprise the market unnecessarily with their announcement on Wednesday.  Interestingly enough, in either case, the Fed seems a bit worried.  If they do not know what they are going to do, then they are definitely worried.  And if they know what they are going to do, but don't want to surprise the market, then are also just as worried.  In either case, a worried Fed is not a good thing for financial markets.  Therefore, the dollar fell today.  Equity markets fell as well, with the Dow falling during mid-session before rallying a bit in the early afternoon and resting just below the open.

U.S. Dollar Index

We have been paying special attention to the U.S. dollar index over the last week in order to determine whether we are forming a bottom in the USDX Daily Chart.  Yesterday, we discussed that a higher low is now in place on the daily chart, but yesterday, price was unable to break the previous HI.
 
As you can see, yesterday's candle was making a run for the previous HI, but it was rejected and formed a doji formation on the close.  Today's candle has, of course, sold off heavily, but as of late-New York trading, it has respected the lower trendline, which is a positive sign that the USDX could be bottoming out.  At this point, the triangle wedge you see in the chart above is simply a consolidation pattern. 

The dollar could realistically break either way from here, but the break will most likely be sharp and strong.  We are still looking for 80.00 to act as the next area of major resistance to the upside.  At this point, the fate of the dollar will most likely lie square in the hands of tomorrow's GDP release and next Wednesday's Fed announcement.

GBP/USD

Nationwide Housing Price Index came out worse than expected this morning during the London Session at -0.7% versus the expected -0.3%.  This is definitely not a good indicator of price stability in U.K. property markets, but the pound shrug off this bad news, and still gained aggressively versus the dollar.
 
The pin bar and large red candle that directly precede the price rise today formed in the direct aftermath of the HPI figure, but within 2 hours, the market had completely discounted the negative U.K. news and began buying the pound, and the buying continued well into the NY Session as the GBP/USD moved a total of 216 pips on the day, well past its 20-day Average Range of only 133 pips.

GBP/USD also took out several key technical levels during its rise including the 1.5890 level.  Price did finally reject strong from the 1.5974 level, however, before price finally retraced all the way back down to the 1.5915 area.  Price will most likely remain sideways during the late NY session, Asia, and possibly even London until GDP is released in the U.S. tomorrow morning.  The most likely scenario is that the market will not want to push the dollar above yesterday's HI's on the USDX Daily Chart until the GDP figure is released.

U.S. Unemployment Claims

Each week, Unemployment Claims is released in the United States, and today's number beat market expectations.  The figure came out at 434k versus an expected 453k.  Today's figure is actually a 3-month low, which is a strong indication that the very bleak U.S. labor market may be stabilizing.  Labor market conditions at are at very pessimistic levels overall; in fact, jobs, or the lack of them, has been a central theme of debate in recent mid-term election debates.  Furthermore, a very anemic labor market is one of the primary reasons the Federal Reserve has been so adamant concerning the possibility of further QE measures.  Therefore, today's positive number was warmly received by the market.  However, markets are fickle, and the number was not good enough to bring any lasting strength to the U.S. dollar.  The dollar continued to sell-off in the aftermath of the news release as investors sought to square short dollar positions heading into tomorrow's GDP release.

Economic data over the last 6 weeks has been, at worst, mixed for the United States.  It definitely has not shown signs of material weakening, which means some level of economic stability is now in place in the U.S. economy.  Unfortunately, the stability that is in place is at a very low level.  If tomorrow's GDP figure does surprise to the upside, look for the dollar to rally aggressively, as it will most likely be a capstone to the cautiously positive data flow we have seen out of the U.S. over the last several weeks, and will most likely solidify the Fed's decision to either go ahead with a very light version of QE, or to hold off altogether.  Either of those two scenarios should help push the dollar a bit higher.