Talking Points:
- EUR/USD's sixth gain in seven days continues to lead to ongoing weakness in the DXY Index.
- A confrontational tone by the US at the G7 meetings may rekindle fears of trade wars developing over the coming months.
- Retail traders remain net-short the US Dollar, but have trimmed their positions substantially over the past week.
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US Dollar on Pace for Fourth Day of Losses
The US Dollar (via DXY Index) is on pace for its fourth consecutive day of losses (and six out of seven overall) as traders have turned their attention to the upcoming G7 meeting in Canada.
The pullback in the US Dollar has little to do with risk appetite, which has been bolstered in recent days after sharp rebounds by US stocks and US Treasury yields. Concurrently, little attention is being paid to Fed rate expectations, where the odds of a December rate hike (tallying four total for 2018) have risen back to near 50%.
DXY Index Price: Daily Timeframe (August 2017 to June 2018) (Chart 1)
Reports have emerged that key US trading partners are ready to strike a confrontational tone with the Trump administration over its stance on trade, leaving the US Dollar to the whims of speculation around potential trade wars developing (which, historically, are bad for the greenback).
Now that the DXY Index has broken its uptrend from the mid-April and May swing lows, further losses look likely in the near-term as the momentum profile turns more negative: price is below the daily 8-, 13-, 21-EMA envelope; and both MACD and Slow Stochastics have started to turn lower (albeit in bullish territory). The current target for the sell off is down near 92.50/65, the November and December 2017 swing lows and the January 2018 swing higher.
Euro Rallies for Sixth Day in Last Seven as Italian Yields Drop
Much of the attention paid to the Euro over the past week has been revolving around the new Italian government and its exorbitant fiscal spending plans. However, with new Italian Prime Minister Giuseppe Conte promising to reduce Italy's debt burden alongside new spending efforts, Italian bond yields and CDS spreads have come down today, providing more room for the Euro to recover.
Italy is likely to take a backseat even more in the coming days as attention shifts to the European Central Bank's June policy meeting next week. We've already seen how speculation over the ending of the ECB's QE program has moved markets this week, and although we're in the quiet period in the run-up to the meeting, traders will likely continue to speculate in the absence of meaningful commentary by policymakers.
EUR/USD Price: Daily Timeframe (August 2017 to May 2018) (Chart 2)
Given that the Euro is 57.6% of the DXY Index, it's of little surprise that price action in EUR/USD is essentially a mirror image of what's happening to the broad gauge of greenback strength. Price has started to move back through 1.1823, the low established on May 5 (and has subsequently served as resistance on a closing basis since the break on May 16), signaling the potential for further gains in the days ahead.
Commensurate with the DXY Index eying a return back to 92.50/65, EUR/USD's near-term target also aligns with swing levels in November and December 2017 and January 2018 around 1.1945. Ongoing volatility over the coming week should be expected with the G7 over the next two days, the Fed meeting next Wednesday, the ECB meeting next Thursday, and finally the BOJ meeting next Friday.
Read more: Euro Turns Higher on QE Speculation Ahead of ECB Next Week
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
