- DXY rally has been driven by higher US Treasury yields, which have slipped back to key support levels.
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The US Dollar has been struggling to find meaningful traction over the last few days, as a combination of profit taking and speculation over how wage data will influence have led to a choppy trading environment. With a rather dull economic docket the next two days (ahead of the five Fed speakers on Thursday), traders may want to pay attention to the main driver behind the US Dollar rally in the first place: US Treasury yields.
Both the US Treasury 2-year and 10-year yields have increased significantly over the past two months, starting with the US elections in early-November. The recent pause in the rising yield environment has proven to be a signficant hurdle for the US Dollar to clear; indeed, USD/JPY and EUR/USD have started to back away from their recent bullish-USD tendencies.
The key question is whether or not market participants feel warranted in maintained their current aggressive outlook. After all, with the CFTC's COT report showing that speculators are the most net-short US Treasuries (long yields) ever, it will only take a small bit of disappointment - on either the data side or from the Fed - before momentum collapses on itself and yields pullback.
The line in the sand is clear for me: abandon USD-bullishness in the near-term if the US 2-year yield closes its daily 34-EMA or 1.145%; and if the US 10-year yield trades below 2.333% (which would take out the January 2017 and December 2016 lows). If yields maintain these levels, then the US Dollar pullback should be limited. A break higher above 1.255% in the US 2-year yield or above 2.578% in the US 10-year yield would signify strong potential for a further resumption of the US Dollar's recent uptrend.
--- Written by Christopher Vecchio, Senior Currency Strategist
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