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DXY Index Faces First Test in Bottoming Effort

DXY Index Faces First Test in Bottoming Effort

Talking Points:

- The US Dollar is gaining ground again today following Fed Chair Yellen's commentary yesterday, which has sent US yields shooting higher.

- USD/JPY's triangle breakout, Gold's breakdown suggest more US Dollar gains are due.

- Retail trader sentiment is shifting rapidly in EUR/USD and USD/JPY after recent moves.

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For several weeks, including before the FOMC last Wednesday, we've urged caution when looking at the US Dollar: as long as the DXY Index held below the August 23 bearish outside engulfing bar high at 93.44, the odds of the US Dollar bottoming were minimal. Now, the DXY Index has now risen back to test this crucial resistance level, having established a daily high at 93.50 at the time this report was written.

A close beyond 93.44 through the end of the week would be consequential for another reason: it would mean that the DXY Index would have broken the downtrend from the pre-French election highs in April. EUR/USD has already lost this trendline, and now appears be in the throes of a head & shoulders topping pattern that calls for a move into the mid-1.1500s.

As the largest component of the DXY Index, the Euro's turn lower against the US Dollar is a significant development. But so too is the breakout in USD/JPY, as the Japanese Yen is 13.9% of the aggregation. Now that the US Treasury 10-year yield has turned higher through 2.286%, USD/JPY has the catalyst it needs to extend to fresh mulit-month highs; a return to the April and July swing high near 114.50 is expected.

See the above video for a technical review of the DXY Index, EUR/USD, GBP/USD, USD/JPY, AUD/USD, USD/CHF, Gold, and US yields.

Read more: EUR/USD Head & Shoulders Suggests US Dollar is Bottoming

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

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.