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DXY Index Hits Yearly High as China-US Trade Tensions Rise

DXY Index Hits Yearly High as China-US Trade Tensions Rise

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- USD/CNH has rallied to a fresh 2018 high alongside the DXY Index as China-US trade war tensions deepen.

- A quiet economic calendar in context of the World Cup means the news wire will remain the most potent source of risk for FX markets in the days ahead.

- Retail traders continue to sell the US Dollar, a contrarian buy signal.

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

The US Dollar (via DXY Index) has hit a fresh high for 2018 as traders have been quick to lap up the world's reserve currency as a safe haven as market sentiment erodes. The China-US trade war tensions were ratcheted higher overnight after the Trump administration unexpectedly announced plans to seek another 10% tariff on $200 billion of Chinese goods.

With the Chinese government pledging to respond, it would appear that traders are starting to get a sense that the China-US trade war tensions are not merely a 'bug' in the current environment but rather a key 'feature' that will be present for weeks and months to come. US equity market futures are pointing to the worst trading day of June so far as the prospect of a protracted trade war deepens.

The drop by higher yielding currencies and risk-correlated assets comes as USD/CNH has moved to a fresh yearly high - perhaps a retaliatory measure already in place to effectively weaken the Chinese Yuan relative to the US Dollar as a way of offsetting the impact of the Trump tariffs.

In an otherwise quieter trading environment thanks to a dull economic calendar doing little to draw attention back to markets and away from the World Cup, the news wire is proving to be the most potent source of risk in FX markets. This should continue to remain the case over the next 24- to 48-hours.

DXY Index Price: Daily Timeframe (July 2017 to June 2018) (Chart 1)

DXY Index Hits Yearly High as China-US Trade Tensions Rise

Bullish momentum remains firm for the DXY Index, with price holding above the daily 8-, 13-, and 21-EMAs. Concurrently, both MACD and Slow Stochastics have turned higher in recent days, and a close through 95.17 - the high from the July 20, 2017 bearish outside engulfing bar, as well as the October and November 2017 swing highs - would offer a fresh buy signals in both of the indicator today.

Read more: Euro Forecast: Euro Eyes Sintra ECB Forum for Next Cues

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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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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