Talking Points:

- DXY Index has poked through 101.03 - but there hasn't be a close above it on the 4-hour timeframe just yet.

- Fed's Yellen doesn't need to be specific in her reflections on fiscal policy in order to help the US Dollar move higher.

- Keep an eye on short-term positioning shifts with the DailyFX Speculative Sentiment Index.

The US Dollar Index (DXY) has made strides towards establishing a bottom in recent days, but it's still not quite there just yet. The key hurdle we discussed last week remains in play, even as DXY Index has peeked above 101.03 at the start of the week. Yet the fact remains, without a 4-hour close through 101.03 - and thereby negating the key reversal established intraday on January 30, the most recent swing high in the downtrend from the start of the year - it's still to early to call the bottom in the DXY Index.

With that said, it appears that the US Dollar is starting to realign with the US 2-year yield, suggesting that market participants are shaking off the past two-weeks of divergence amid concerns that fiscal reform (infrastructure spending and tax cuts) would be pushed back to late-2017 or early-2018. With Fed Chair Janet Yellen set to testify today in front of the Senate Banking Panel (10 EST/15 GMT), there may be a catalyst on the horizon that could help push yields higher, and thus, carry the DXY Index through 101.03.

While we don't expect Fed Chair Yellen to speak specifically about her opinions on a potential Trump fiscal stimulus program, she won't need to in order to help support the US Dollar. Broadly speaking, a Trump fiscal stimulus program would result in a wider US structural budget deficit. As discussed previously, from a theoretical standpoint - in this case, the Mundell-Fleming framework (or IS-LM-BOP model) - given the United States' high capital mobility, loose fiscal policy should lead to a rise in inflationary pressures, which in turn should necessitate tighter monetary policy from the Federal Reserve.

As such, simply by speaking in vague terms, like 'with the US labor market near full employment, any deficit spending from here on out would likely boost inflationary pressures, which in turn would necessitate a faster pace of rate normalization' Fed Chair Yellen may come across with a hawkish blush. While we don't think it is likely, a rate hike in March may be implicitly left on the table; and with markets pricing in roughly a 30% chance of a 25-bps hike next month, any suggestion that the door is open to a faster pace of rate hikes could be enough to drive the DXY Index back over the 101.03 wall.

See the above video for a technical review of the DXY Index, EUR/USD, AUD/USD, USD/JPY, USD/CAD, and AUD/JPY.

Webinar Schedule for Week of February 12 to 17, 2017

Monday, 7:30 EST/12:30 GMT: FX Week Ahead: Strategy for Major Event Risk

Wednesday, 6:00 EST/11:00 GMT: Trading Q&A

Thursday, 7:30 EST/12:30 GMT: Central Bank Weekly

Read more: FX Markets Look to Chinese, UK, & US CPI, Yellen Testimony Midweek

--- Written by Christopher Vecchio, Senior Currency Strategist

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

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