- Retail crowd positioning has eased, but remains near extreme levels in a few USD-pairs.
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A dramatic rebound in risk appetite the past few days has proven to buoy the US Dollar, with the DXY Index rising for a second consecutive day today. The surge in US equities back towards yearly highs - and in the case of the S&P 500, to all-time highs in the futures market pre-cash open today - has been joined by a rise in US Treasury yields, as investors flee safe haven positions.
The combined effort of improved risk appetite and rising US yields has helped the US Dollar versus as specific set of currencies in particular: the low yielding safe havens, the Japanese Yen and the Swiss Franc. While there is much to be optimistic about in the near-term, it's important to take a step back in both USD/CHF and USD/JPY and see the forest from the trees: both pairs remain in downtrends. In neither pair have we seen prior swing highs broken.
This theme of, 'the tide may be starting to turn for the US Dollar, but just not yet' is prevalent elsewhere as well. While the DXY Index has had a nice bump this week, it still hasn't closed above its daily 21-EMA since June 22. Similarly, as EUR/USD pulls back, it's worth noting that it hasn't closed below its daily 21-EMA since June 22 either (no surprise there, considering the Euro is 57.6% of DXY).
For now, the bump in risk appetite the past few days has filtered through to a stronger US Dollar via US Treasury yields, but it's still far too soon to say that a low is in place. Aside from the daily 21-EMA (now at 92.56), traders may want to wait for further confirmation for a DXY Index low until the August 25 bearish outside engulfing bar is cleared out at 93.44.
See the above video for technical considerations in the DXY Index, EUR/USD, GBP/USD, USD/JPY, USD/CHF, and Gold.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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