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DXY Bottoming, EUR/USD Topping Patterns Point to USD Strength

DXY Bottoming, EUR/USD Topping Patterns Point to USD Strength

2017-10-27 11:27:00
Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- US Treasury yields continue to push higher supporting more US Dollar strength, with the 2-year yield at its highest level since 2008 and the 10-year yield at its highest level since March.

- British Pound may be facing a 'buy the rumor, sell the news' event in the BOE rate decision next week.

- Retail trader sentiment suggests the near-term outlook for the US Dollar is neutral.

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The US Dollar is up again on the day as the DXY Index has registered two positive technical developments this week. First, yesterday's bullish outside engulfing bar signifies that the uptrend from the September 8 low is still very much valid. Second, the close above 94.29 suggests that an inverse head & shoulders bottoming effort may be underway. In other words, the DXY Index is telling us that the US Dollar has bottomed for 2017.

Chart 1: DXY Index Daily Timeframe (May to October 2017)

DXY Bottoming, EUR/USD Topping Patterns Point to USD Strength

With the US Treasury 2-year yield at its highest level since late-2008 and the 10-year yield at its highest level since March of this year, the US Dollar's backbone - interest rates - is firming up in its favor. In an environment otherwise characterized by central banks continue to deploy exceptionally low benchmark rates, any push higher by US yields will go a long way to support a stronger US Dollar.

Chart 2: Inverse USD/CHF, Inverse USD/JPY, Gold, & US Treasury 10-year Yield Hourly Timeframe (September to October 2017)

DXY Bottoming, EUR/USD Topping Patterns Point to USD Strength

Two of the most appealing places remain be USD/CHF and USD/JPY, given these pairs' sensitivity to US interest rates and their relationship to risk dynamics. Throughout September and October, Gold, US yields, USD/CHF, and USD/JPY have traded synchronously, and this should continue for the foreseeable future.

Read more: Euro Stumbles as ECB Signals Tightening of Monetary Policy

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

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