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USD/JPY's Rally Holds Little Sway over DXY Index

USD/JPY's Rally Holds Little Sway over DXY Index

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- USD/JPY has rebounded sharply since the first round of the French elections (April 23), with Gold losing traction as well.

- However, with Euro continuing to consolidate, further strength in USD/JPY means little for broader recovery in DXY Index.

- Net-long positioning in USD/JPY has dropped sharply over the past week, while the crowd has added onto its net-short EUR/USD position - see the latest IG Client Sentiment readings here.

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The averted US government shutdown has provoked rally in higher yielding currencies and risk-correlated assets, with higher US Treasury yields helping lift USD/JPY and sink Gold prices. Yet even as USD/JPY's impressive rally over the past seven trading sessions continues (nearly +3% since April 21), DXY Index has seen little by way of a recovery.

Given that the Japanese Yen only constitutes 13.6% of the DXY Index, there is little recourse for a USD/JPY rally to help the broad gauge of the US Dollar stage a recovery. DXY Index remains muddled within the trading range established last week after the first round of the French elections, which, while seemingly reducing overally concerns among market participants, has done little to sway traders' feelings towards the greenback more generally.

Of course, given that the Euro constitutes 57.6% of the DXY Index, we'll have to see traction in EUR/USD before DXY stages either a recovery off of longstanding trendline support or a breakdown from a year-long uptrend. With the second round of the French elections coming up this Sunday, May 7, and before then, the April US labor market report on Friday, May 5, traders may not have the appetite to provoke a significant move in either EUR/USD or DXY Index before said events come to pass.

Chart 1: DXY Index Daily Timeframe (May 2016 to May 2017)

USD/JPY's Rally Holds Little Sway over DXY Index

Accordingly, with a quiet calendar ahead of us in the North American trading session - there are no meaningful Canadian or US economic data releases due out - a bit of extra attention should be tuned into the newswire. With the US House of Representatives heading to another recess from May 5 to May 15, the Trump administration may be working overtime this week to get a healthcare reform bill on the floor of Congress. As we saw at the end of March, the US Dollar has proven sensititve to developments around this issue, given the implications for fiscal stimulus more broadly.

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

Read more: Euro Treads Water After ECB Holds Course, Waiting for French Elections

--- Written by Christopher Vecchio, Senior Currency Strategist

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

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.

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