DXY Trying to Bottom; Watch EUR/USD, Not USD/JPY
The US Dollar (via DXY Index) is once again attempting to bottom, putting in another try to break the trendline from the January 3 high. There are several factors that may be feeding into the greenback's increasing appeal today, including speculation over the timing of the Federal Reserve's next 25-bps rate hike: Philadelphia Fed President Patrick Harper said that he thinks "March is on the table," while noting his support for three rate hikes this year (currently, Fed funds futures only have two priced in, for June and December).
Yet this hawkish appeal is only a small piece of the puzzle. Indeed, as the largest component of DXY, the Euro is front and center (57.6% total weighting). Two developments thus far today have the Euro reeling. First, as we pointed out yesterday, Greek bond yields have continued to shoot higher, with the 2-year yield near 10%, as questions over whether or not the IMF will stay in the Greek bailout program persist. As German FinMin Wolfgang Schaeuble's spokesman Juerg Weissgerber made clear yesterday, if the IMF were to pullout of the Greek bailout, "then the program is over."
Elsewhere, in terms of the economic docket, while largely absent of 'high' rated events this week, the data that has been revealed for the Euro has been rather disappointing. Even though the data is a bit stale - it's for the December reporting period - it still carries weight. German industrial production unexpectedly fell by -3% from November, culminating in a -0.7% performance year-over-year.
While the German Economy Ministry said that the figures may be attributed to the compilation methodology - thus having no impact on the ministry's otherwise positive growth assumptions for 2017 - one can't help but feel that the protectionist wave sweeping across the world's developed economies will inevitably hit Germany, Europe's largest economy, particularly if US President Trump takes aim at what he considers to be an artificially cheap Euro (there may be a point: PPP suggests EUR/USD should be trading closer to 1.3000).
For traders, it's worth paying more attention to EUR/USD, and say, GBP/USD, than it is to pay attention to USD/JPY over the coming days. With the Trump-Abe meeting set for Friday - and the Japanese Yen being one of the three currencies President Trump has lambasted (the others being the Euro and the Chinese Yuan) - it seems that any additional USD strength will find more welcoming conduits elsewhere. Both EUR/USD and GBP/USD have seen dramatic shifts in positioning over the past week which cater to the idea that more US Dollar strength may be on the horizon.
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--- Written by Christopher Vecchio, Senior Currency Strategist
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