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Talking Points:

- With the US Treasury 10-year yield at its highest level since July 2011, the DXY Index has hit a fresh high for 2018.

- USD/JPY has broken out of a sideways consolidation to the topside, revealing a measured target neat 111.50.

- Retail traders are starting to flip back to net-short US Dollar positions, which is a contrarian long signal for the greenback.

Looking to learn more about how central banks impact FX markets? Check out the DailyFX Trading Guides.

US Dollar Gains on Retail Sales, Yields Run Higher

The US Dollar (via DXY Index) has rallied to its highest level of 2018 following this morning's April US Advance Retail Sales report. The look at sales revealed a solid pace of buying by US consumers, underpinning what should be considered a stable growth environment.

Even if the report simply means one less obstacle in the way of the Federal Reserve raising rates again in June, it has proven to be a potent enough catalyst to put the DXY Index on pace for its best day of the month.

DXY Index Price: Daily Timeframe (August 2017 to May 2018) (Chart 1)

US Dollar Pacing to Fresh Yearly Highs as US Yields Jump

Bullish momentum remains firmly in place for the DXY Index, with price now treating the daily 13-EMA as key support in the uptrend. MACD and Slow Stochastics continue to trade near overbought territory, suggesting that topside momentum is firm. A close through the prior May high of 93.42 would suggest further gains into the December 2017 high at 94.22.

With the US Treasury 10-year yield breaking through its January 2014 high on the way to its highest yield since July 2011, the US Dollar has seen its recent rallies versus lower yielding currencies like the Euro and the Japanese Yen push forward as well.

Euro Drops as Streak of Data Weakness Continues

Prior to the release of the US retail sales figures, Q1'18 German GDP figures came in weaker than anticipated, another sign that economic data momentum for the Eurozone remains incredibly weak. More weakness may be ahead for the Euro with the final release of the April Eurzone CPI report due out on Wednesday, which is expected to show another decline.

EUR/USD Price: Daily Timeframe (August 2017 to May 2018) (Chart 2)

US Dollar Pacing to Fresh Yearly Highs as US Yields Jump

With price momentum firmly negative (EMAs, MACD, Slow Stochastics), EUR/USD is eying a break below its May low at 1.1823 to signal continuation towards the December 2017 swing lows near 1.1720 (corresponding with the measured move higher by the DXY Index). Similar to the DXY Index, price is treating the daily 13-EMA as the key support level in the downtrend.

USD/JPY Uptrend Set to Resume

US yields breaking higher translates into a direct benefit for a carry trade pair like USD/JPY. The Yen component has a central bank keep rates pegged at or below zero, while the US Dollar component has a yield complex that is showing higher rates across the curve. Higher US Treasury yields are directly beneficial for USD/JPY.

USD/JPY Price: 4-hour Timeframe (January 2018 to May 2018) (Chart 3)

US Dollar Pacing to Fresh Yearly Highs as US Yields Jump

USD/JPY has been trading in a steady uptrend since the end of March, but over the past three weeks, price had been trading in a sideways consolidation. However, following the breakout in US Treasury yields today, USD/JPY has too moved through the topside of its recent consolidation.

The break through the earlier May highs near 105.05 now sets price on course to test the February high just below 110.50, and thereafter, a return to the mid-January swing level of 111.48.

Read more: US Dollar Rally Continues to Build, Nine Gains in 11 Days

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

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

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