Talking Points:

- DXY Index reached a critical juncture yesterday before profit taking ensued.

- G20 meeting may be stoking fears that "undervalued" currencies may be addressed; JPY is front and center.

- Keep an eye on short-term positioning shifts as traders turn against the US Dollar with the DailyFX Speculative Sentiment Index.

G20 foreign ministers are meeting in Bonn, Gerrmany, against a backdrop of growing geopolitical tensions and policy uncertainty surrounding one of its most important members, the United States. In effect, this is a 'dry-run' to see how the new Trump administration handles itself on the world's stage, ahead of the annual G20 summit meeting in July.

Yet as world leaders meet, the spectre of the dramatic shift in US policy clearly casts a long shadow over FX markets. For the past several weeks, US President Trump and several members of his administation have commented on how the US Dollar is overvalued relative to other currencies, with some even pointing to the Euro, the Japanese Yen, and the Chinese Yuan directly as the main antagonists in the market.

In the meanwhile, as the DXY Index goes through a moment of profit taking after yesterday's January CPI and Advance Retail Sales reports were the catalysts to seeing the greenback return to its highest level in four-weeks, it's important to stay focused on the US Dollar's fundamental underpinning: US yields and Fed rate expectations. This time last week, markets were pricing in less than a 30% chance of a rate hike come March; now, odds are north of 40%. As long as short-end US yields stay elevated and markets look to data for hints of a hike next month, the greenback's pullback may be limited.

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: Led by EUR/USD & USD/JPY, DXY May Have Bottomed

--- Written by Christopher Vecchio, Senior Currency Strategist

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

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