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Euro Rallies on Draghi Commentary; Dollar Waits on Yellen

Euro Rallies on Draghi Commentary; Dollar Waits on Yellen

Talking Points:

- DXY Index trades to lowest levels since June FOMC meeting after ECB President Draghi issues hawkish commentary on inflation.

- Fed Chair Yellen to speak at 17 GMT today; a round of hawkish commentary could help reverse intraday US Dollar losses.

- The retail crowd is still net-short AUD/USD, EUR/USD, GBP/USD, and net-long USD/JPY, although positioning has abated in recent days.

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The Euro is the top performing major currency as the page turns to North America thanks to the perception of hawkish commentary from European Central Bank President Mario Draghi. As the largest constituent of the DXY Index, Euro strength has translated into DXY weakness, which has now erased all of its gains since the June 14 FOMC meeting.

"A constant policy stance will become more accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instruments – not in order to tighten the policy stance, but to keep it broadly unchanged," said the ECB chief. This has been interpreted as a signal that the ECB is ready to reduce to its bond-buying program once again, which currently sits at €60 billion per month. Another step down in the pace of asset purchases could come as soon as September, when the ECB's next set of staff economic projections (SEPs) are set to be released.

While ECB President Draghi's commentary may be seen as the turning point for what's been a lethargic Euro lacking bullish fundamental drivers, the US Dollar may not end up in the red when all is said and done today.

Fed Chair Janet Yellen is set to speak at 13 EDT/17 GMT today, and she has been one among many Fed officials that have touted the FOMC's desire to raise rates for a third time this year as well as begin the balance sheet normalization process. In her speech today, if the Fed chair comes out and talks up the Fed's prescribed path of rates, it may force the market to consider its dovish pricing, which currently sees the next rate coming in March 2018 - a far cry from Fed policymakers have been telling us.

Given the commentary from ECB President Draghi, which should be meaningful enough to keep the Euro elevated, EUR/USD may not be the best place to look for a US Dollar recovery around Fed Chair Yellen's comments today. Instead, if Yellen's commentary provokes a move higher in US yields, the greenback may be better suited for gains versus currencies like the British Pound or the Japanese Yen. Concurrently, as the Japanese Yen goes, so too does Gold; Yellen's speech should have a noticeable impact across asset classes later on today.

See the above video for technical considerations in EUR/USD, GBP/USD, USD/JPY, EUR/GBP, Gold, USD/CAD, Crude Oil, and the DXY Index.

Read more: US Dollar Heads into Barrage of Economic Data This Week

--- Written by Christopher Vecchio, Senior Currency Strategist

To contact Christopher Vecchio, e-mail

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.