Talking Points:

- Yield-sensitive currency pairs like USD/CHF and USD/JPY are taking a breather amid US Treasury yields pulling back slightly.

- Soft Eurozone inflation figures and the rise of a Euroskeptic government in Italy have EUR/USD on its back foot again today.

- Retail traders are now net-long both EUR/USD and GBP/USD, strengthening the contrarian case for more US Dollar strength.

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US Dollar at Fresh 2018 High

The US Dollar (via DXY Index) has set a new high for 2018 (the highest level since December 19, 2017) as investors globally continue to grapple with the consequences of the US Treasury 10-year yield pushing to its highest level since July 2011.

While yield-sensitive currency pairs like USD/CHF and USD/JPY are taking a breather as US Treasury yields pull back slightly, soft Eurozone inflation figures and the rise of a Euroskeptic government in Italy have EUR/USD on its back foot again today.

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

EUR/USD Open to Further Losses; USD/JPY Eyes Bullish Resolution

In the near-term, the technical outlook for the US Dollar remains bullish. Positive momentum remains, with price treating the daily 13-EMA as key support in the uptrend. MACD and Slow Stochastics continue to trade near overbought territory, suggesting that bullish momentum is healthy.

Although encroached yesterday initially without success, a close through the prior May high of 93.42 would suggest further gains into the December 2017 high at 94.22.

Euro Slide Continues amid Low Inflation, Concern Over Italy

Another decline emerged in Eurozone CPI figures today, with the final April reading coming in at +1.2% from +1.3% (y/y). The data couldn't come at a worse time for the Euro, where relative to the US Dollar inflation differentials as well as bond yield differentials are blowing out in favor of a weaker EUR/USD. The drop today represents a move to a new monthly low in addition to a fresh low for 2018.

Elsewhere, signs that the Lega and Five Star Movement parties would come together to form a Euroskeptic, populist government have started to reintroduce some political uncertainty back into the equation for the Euro. There has been chatter that the populist Italian government would seek to write-off some of their debt, sending Italian bond yields higher. As is often the case, bonds tend to be the canary in the coal mine.

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

EUR/USD Open to Further Losses; USD/JPY Eyes Bullish Resolution

Bearish momentum remains firmly negative (EMAs, MACD, Slow Stochastics) now that EUR/USD is breaking below its May low at 1.1823. This signals the beginning of a continuation effort 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 continues to treat the daily 13-EMA as the key support level in the downtrend.

USD/JPY Breakout Conditions Set - Will They Hold?

The break higher in US Treasury yields has been immensely beneficial for USD/JPY, so it's of little surprise that on a day like today where yields have taken a breather, so too have yield-sensitive currency pairs. Almost tick-for-tick have the US Treasury 10-year yield and USD/JPY moved together in recent days. If this relationship breaks down, look to slumping stocks as the catalyst: higher yields can lift USD/JPY so long as equity markets don't drop.

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

EUR/USD Open to Further Losses; USD/JPY Eyes Bullish Resolution

USD/JPY hit its first test of resistance yesterday when it approached the February high just below 110.50 and failed. Ultimately, with price having broken through the earlier May highs near 105.05, further topside resolution is eyed. The mid-January swing high at 111.48 remains the targeted level for now.

Read more: US Dollar Pacing to Fresh Yearly Highs as US Yields Jump

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

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