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USD/CHF, USD/JPY Outlooks Remain Bullish as US Yields Stay Elevated

USD/CHF, USD/JPY Outlooks Remain Bullish as US Yields Stay Elevated

Talking Points:

- US Treasury yields have broken out to multi-month highs: the 2-year is at its highest level of the year; and the 10-year is at its highest level in two-months.

- EUR/USD break back above 1.1820/25 threatens to invalidate the near-term head & shoulders topping pattern.

- Retail trader sentiment has seemingly turned the corner across most USD-pairs.

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The second down day in a row for the US Dollar comes as the DXY Index has run into a defining level for 2017, the descending trendline from the April and May swing highs. Despite this, the US Dollar is on track for its best week of the year, which given how late in the year it is, speaks to the poor performance by the greenback through the first three quarters.

The pullback in DXY Index appears to be largely driven by EUR/USD, which has responded positively to former resistance turned support around 1.1715. Since the break above 1.1715 at the end of July, EUR/USD has been treating this level as support. A break below here would suggest increased validity for the EUR/USD head & shoulders target of 1.1554. On the contrary, a further push higher through 1.1820/25, the neckline of the head & shoulders pattern, may invalidate the near-term bearish outlook.

The best place right now to look for US Dollar strength are against the low yielding, safe haven currencies: the Japanese Yen and the Swiss franc. Both USD/CHF and USD/JPY have showed heightened sensitivty to US Treasury yield moves throughout September, with both pairs bottoming within a day of the US Treasury 10-year yield hitting its low this month.

USD/CHF's rally has paused in the 0.9730/70 area, where the range top from May and the declining trendline from the December 2016, March 2017, and April 2017 highs converge. Yet like USD/JPY, USD/CHF is finding support on the daily 8-, 13- 21-EMA envelope; bullish momentum remains strong. Now that the US Treasury 2-year yield is at its highest level of the year, and the US Treasury 10-year yield is at its highest level in two-months, both USD/CHF's and USD/JPY's pullbacks should be well-contained.

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: DXY Index at Resistance as Key USD-pairs Pause

--- 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.