Talking Points:

- Reversal candles in EUR/USD (inverted hammer) and USD/JPY (bullish key reversal) provide hope for US Dollar bulls...

- ...but given how weak US yields remain and how Gold has retained its breakout posture, it's still too soon to call a turn.

- Retail crowd positioning remains at extreme levels in USD-pairs despite yesterday's sharp reversal.

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A dramatic turnaround in risk appetite during the second half of the trading day yesterday in the United States has left the US Dollar in the position of having people ask, are we at a tradable low? Certainly, the bearish inverted hammer in EUR/USD and the bullish key reversal in USD/JPY warrant respect; the question is, just how much?

For now, the reversal seen in the DXY Index yesterday is nothing more than an anecdote in a sustained technical downtrend. The case can be made that yesterday was an exhaustion low, given current sentiment and positioning readings.

Yet just like we did throughout early-August, when we identified a key resistance level necessary to be broken before a 'bottom' was called (and that July 26 high of 94.29 never was), there is a new, more recent hurdle that needs to be cleared before we can say an effort at bottoming is being sincerely attempted: the August 25 outside engulfing bar high of 93.44. One day's worth of price action hasn't provided enough evidence to suggest the reversal is set in stone.

The synchronous bullish key reversals among the JPY-crosses yesterday definitely warrant consideration, but the fact is that with US Treasury yields having yet to rise meaningfully and Gold maintaining its bullish breakout posture, it's too soon to endorse a fundamental turnaround in USD/JPY.

Concurrently, without the European Central Bank explicitly condemning EUR/USD's sharp rise this year, the Euro has a bit more breathing room to rally (although it seems that it is only a matter of time before the ECB says something about the exchange rate).

Over the coming days, traders looking for a US Dollar low should keep an eye on the economic calendar for two 'high' rated releases that will surely move markets. Thursday's August US Core PCE figures are the Federal Reserve's preferred gauge of inflation and will provide direct insight as to how close the Fed is to achieving the inflation side of its dual mandate.

On Friday, the August US Nonfarm Payrolls report will give us a look at the other side of the Fed's dual mandate, the labor market. A solid one-two punch from these key data releases would go a long way towards helping the US Dollar stabilize in the short-term, much like data in the first week of August cleared the way for stability through the end of last week.

See the above video for technical considerations in the DXY Index, EUR/USD, GBP/USD, USD/JPY, NZD/USD, the S&P 500, and Gold.

Read more: US Dollar Slammed as Safe Haven Demand Surges

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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

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