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US Dollar (DXY) Regaining Bullish Posture; Rising Yields Hit Yen

US Dollar (DXY) Regaining Bullish Posture; Rising Yields Hit Yen

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- Outside engulfing bars yesterday in both EUR/USD and DXY Index bode well for further US Dollar strength.

- JPY-crosses continue to ride their daily 8-EMAs - Gold is moving lower in a similar fashion, too.

- See the DailyFX Economic Calendar for Friday, December 9, and see what live coverage for key event risk impacting FX markets is scheduled for next week on the DailyFX Webinar Calendar.

The US Dollar, aided by the European Central Bank's surprise decision to expand its stimulus program, is quickly regaining its bullish technical posture, which was seemingly lost earlier this week. The bearish outside engulfing bar in DXY Index on December 5 may now be negated as soon as today, after yesterday's bullish key reversal and a close at or above 101.55 today.

In turn, naturally, given the outsized influence of the single currency on DXY Index (57.6% weighting), the Euro is playing a role in the DXY turnaround. In similar fashion, EUR/USD's December 5 bullish key reversal may be neutralized for the time being, after the bearish outside engulfing bar that formed yesterday. A clear, important level of support has formed just above 1.0500/10 in EUR/USD, and the bearish trend would only be set to resume on a break through said area.

What's interesting today is that, despite EUR/USD weakness, EUR/JPY is trading higher. This speaks to the rising yielding environment and risk-seeking behavior enveloping markets right now. The ECB's decision to drop the -0.40% threshold for bond purchases, in conjunction with their decision to begin buying debt with 1-year maturities, has allowed European yield curves to steepen - mirroring (to a smaller degree) what's already been happening in US Treasuries since early-November.

In a rising yield environment where the BOJ is pegging the JGB 10-year yield at or below 0%, the Japanese Yen stands out to be a loser. Interest rate differentials have moved sharply against the Yen, and appear poised to do so for the foreseeable future (three- to six-months). On a short-term basis, look no further than the momentum exhibited aross the JPY-complex: USD/JPY, GBP/JPY, and CAD/JPY haven't closed below their daily 8-EMAs since November 4. In tandem, Gold is exhibiting the same behavior: it hasn't closed above it's daily 8-EMA since November 4 either.

As noted in the video segment of the Top FX Headlines piece yesterday, US Dollar weakness has been fundamentally unjustified given the rising yield environment and retained steepness of the Fed expectations curve - two rate hikes remain priced-in for 2017. With the FOMC set to meet next Wednesday, traders are likely going to be seeking out confirmation that their reiginted bullish US Dollar sentiment is justified.

See the above video for a technical review of the DXY Index, EUR/USD, GBP/USD, Gold, Crude Oil, USD/JPY, USD/CAD, CAD/JPY, and GBP/JPY.

Read more: December Forex Seasonality Sees US Dollar Weakness into End of Year

--- Written by Christopher Vecchio, Senior Currency Strategist

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Follow him on Twitter at @CVecchioFX

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.