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USDOLLAR Probes Breakout Again After Initial Reaction

USDOLLAR Probes Breakout Again After Initial Reaction

Christopher Vecchio, CFA, Senior Strategist

Talking Points

- EUR/USD driven by soft data, potential incentive for more ECB easing.

- USD/JPY returns to key former support - crucial for forming a bottom.

- Follow live sentiment readings with DailyFX SSI.

After a weak attempt yesterday, the USDOLLAR Index finds itself once again attempting to breakout of its recent two-month consolidation. The inverted hammer that formed yesterday was no surprise, as we indicated our skepticism over the internals of the index; there was no continuity among the pairs. Today, the same remains true, with a twist: whereas in recent days the gains in the USDOLLAR Index have been driven by AUD/USD and GBP/USD; today the catalysts are EUR/USD and USD/JPY.

EUR/USD's decline today is of interest as it may have two sources. First, European equity markets are running higher, and foreign investors may be hedging their exposure (by having a EUR-denominated asset on their balance sheet) by taking out short EUR/xyz positions to eliminate the foreign exchange exposure. However, as noted in the video, this may be becoming a less prominent influence.

Second, the November Euro-Zone Industrial Production report was much weaker than anticipated, raising the odds of a disappointing Q4'15 Euro-Zone GDP report, and in turn boosting the possibility that the ECB sees the soft conditions, in context of energy prices persistently below their 2016 forecast, and acts again when they can present new Staff Projections in March.

USD/JPY, on the other hand, is facing a crucial test of its own. The pair has found itself trading higher back towards ¥118.40, which held as support last February, March, April, August, and October, until finally giving way last week. Likewise, with the daily 8-EMA coming into this level, it seems that this will be an important junction in the short-term. The retail crowd has been fading the recent decline in USD/JPY, just like it has in GBP/USD, so it's important to follow real-time sentiment updates.

Chart 1: USD/JPY Daily: January 2015 to January 2016

USD/JPY daily chart at resistance

See the above video for technical considerations in the USDOLLAR Index, AUD/USD, GBP/USD, EUR/USD, USD/JPY, EUR/GBP and NZD/USD. As always, stay mindful of the environment you're trading in and stay on top of your risk management principles. If you feel like you could be better prepared to protect your capital in these increasingly volatile markets, it would be worth your time to review our risk management series.

Read more: USDOLLAR Index Unconvincingly Attemps Breakout

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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