Talking Points:
- Capital flight out of US financial markets seems to be the common theme on the day, with the US Dollar falling alongside US Treasuries and all three major US stock indices.
- Concerns are cropping up about the rise of interest rates, which could choke off growth in all corners of the globe.
- Retail traders remain net-long EUR/USD and GBP/USD, but sentiment has turned 'mixed' after changes in positioning over the past 24-hours.
Looking for longer-term forecasts on the US Dollar? Check out the DailyFX Trading Guides.
The US Dollar (via the DXY Index) has turned lower back below a key level toyed with over the past four months, as it appears a new theme (or, at least, unseen in many months) has emerged among market participants: sell USA. There are a few reasons why this type of trading environment is rare.
Perhaps the notable shift in tone has been around the relationship between the US Dollar and US Treasury yields. Despite the fact that 2-, 10-, and 30-year yields are all pushing to the topside again - hitting fresh 2018 highs and multi-year highs in the process - the US Dollar is dipping lower.
Otherwise, when the US Dollar isn't being propelled higher by rising yields, it typically means that risk aversion is afoot; the greenback takes on the role of a safe haven. But that't not transpiring either, given that US stocks are on pace for their worst week in six months and the buck continues to slide.
An environment characterized by all three assets sliding - bonds, currency, and stocks - is usually one that foreshadows trouble ahead on the economic and financial horizon. The feeling seems to be spreading that the US economy may have peaked in mid-2018, and that concerns over the US-China trade war, inflation, the housing market, the deficit, and the Fed's rate hike cycle may be becoming too burdensome in the near-term.
S&P 500 Price Chart: Daily Timeframe (May to October 2018) (Chart 1)
The chart that warrants significant attention today is the US S&P 500. The past few days have been characterized by meandering price action failing to break below the January 2018 high (also the all-time high until broken on August 25). But price action has been decisive in its break lower today, moving below its 50-SMA and the rising trendline from the May, June, and July lows in the process. This price action is not unique: the Dow 30 has broken below its 50-SMA; and the Nasdaq 100 is now below its 100-SMA.
DXY Index Price Chart: Daily Timeframe (January to October 2018) (Chart 2)
The shift in tone around the US Dollar warrants a reconsideration of our outlook. The fact that the greenback is no longer rallying in an environment where US yields are rising and/or stocks are falling suggests a schism in key fundamental relationships.
If today is not just a one-off event, and the beginning of a new regime in price action, then the technical outlook previously outined may be less reliable at best, irrelevant at worst. Price is back below its daily 8-EMA for the first time since September 26, while daily MACD is now compressing. A neutral outlook is warranted through the end of the week, assuming the DXY Index closes where it stands now, at least below 95.53.
Read more: DXY Pushes Higher as Euro Weighed by Deepening Italian Woes
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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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