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Dollar faces tough resistance

The German IFO index also strengthened to 105.3 in October from 104.9 the previous month with expectations and current conditions strengthening and the firm economic data will help support the Euro.

The US Richmond Fed index fell sharply to -2 in October from +9 the previous month. The indicator does not normally receive much attention, but there will be concerns that the deterioration follows a weak reading from the Philadelphia Fed index last week. Confidence over the economy will weaken further if there are weak housing-sector reports on Wednesday and Thursday and this would undermine the dollar.

The short-term focus will be on the US Federal Reserve interest rate decision on Wednesday. Markets have been expecting a tough stance on inflation following the meeting, but confidence faltered slightly during Tuesday. The most likely outcome is that the Fed will take a balanced approach as it will continue to warn over inflation, but is also likely to express optimism that inflation will moderate while growth is likely to slow. Any hint of lower interest rates looks unlikely, but would be likely to weaken the dollar sharply.

Overall, the US currency will find it difficult to gain strong buying following the decision as markets have priced in a small possibility of a January rate increase.