Talking Points:
- US Dollar gains have gone hand-in-hand with US equity market weakness, and now, the US Treasury 10-year yield has broken recent support.
- USD/JPY rebound attributed to geopolitical tensions with North Korea subsiding; the daily 21-EMA remains key resistance in the 2018 downtrend.
- Sentiment for the US Dollar has turned negative into the last week of the month and the quarter.
For longer-term technical and fundamental analysis, and to view DailyFX analysts’ top trading ideas for 2018, check out the DailyFX Trading Guides page.
The US Dollar (via the DXY Index) remains near its opening levels of the week despite prices ebbing and flowing since the open on Sunday night in New York. The combination of weaker US equity markets and falling long-term yields - resulting in the 2s10s spread hitting its lowest level of the year - are proving to be a challenging environment for risk appetite.
But geopolitics are back in the foreground as well, with signs that North Korea may be willing to give up its nuclear program in exchange for security for the Kim regime. While this has fueled Japanese Yen weakness, USD/JPY isn't out of the woods yet: it remains below its daily 21-EMA, which it has closed below every session since January 9.
While equity markets seem to be in the driver's seat with respect to the US Dollar, the month-end and quarter-end rebalancing flows are sitting shotgun. Given the long holiday weekend coming up with Good Friday, Easter, and Passover, traders shouldn't dismiss that this week is featuring forces that cater to near-term US Dollar strength.
Recall what our note in the Euro weekly trading forecast, "Speculators have trimmed their net-long Euro contracts from 146.4K to 132.7K in the week ending March 20. With the holiday coming up, this means that a simply closing of open positions to trim risk before the holiday could see the Euro trade lower." As noted yesterday, the British Pound is in a similar boat: at 23.8K net-long contracts, speculators are near their most bullish level of the year (and most since December 2014).
To this end, any pullback in EUR/USD and GBP/USD - and any rally in USD/JPY - this week is likely driven by traders closing out long positions ahead of the holiday weekend as the month and quarter come to a close. By no means is the period of US Dollar weakness over, despite the short-term gyrations seen over the past three days.
See the above video for a technical overview of the DXY Index, EUR/USD, GBP/USD, USD/JPY, Gold, and the US Treasury 10-year yield.
Read more: DXY Rebounds on Cooling Trade Tensions, Month-End Rebalancing
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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