- Euro/US Dollar correlation to US Treasury Yields highest since 2004

- Correlation to interest rates makes upcoming FOMC meeting critical

- Dollar trades at key support and next move could be significant

The US Dollar remains as sensitive as ever to interest rates, and indeed it seems as though the Euro’s next move versus the Greenback will depend on the US Federal Reserve’s next moves.

We’re looking to Wednesday's FOMC meetingto guide the Greenback’s next moves, and it will be critical to watch if the Federal Reserve gives further guidance on the so-called “Taper” of its Quantitative Easing policy.

Euro/US Dollar Correlation to US Treasury Yields at its Strongest in Nearly 10 Years

forex_correlations_Euro_Dollar_to_Treasury_Yields_body_Picture_5.png, FOMC Meeting Critical as Euro/Dollar Correlation to Yields Surges

Data source: Bloomberg; Chart source: R

A Dollar-positive reaction seems unlikely as FOMC officials will almost definitely keep current QE purchases unchanged; disappointing September Nonfarm payrolls data and the negative economic effects of the US government shutdown will keep the Fed’s bias towards easing through the foreseeable future.

Yet if we see any concrete references to a timeline for the Fed’s taper, the Greenback could defy expectations and bounce sharply off of recent lows.

Already we see the Dow Jones FXCM Dollar Index continuing to holdkey trend channel and congestion lows, but our Senior Technical Strategist calls its attempts at a rally “uninspiring”.

Dow Jones FXCM Dollar Index Holding Key Trend Channel Lows

forex_correlations_Euro_Dollar_to_Treasury_Yields_body_Picture_6.png, FOMC Meeting Critical as Euro/Dollar Correlation to Yields Surges

Source: FXCM Trading Station Desktop, Prepared by David Rodriguez.

The stage is set for a potentially significant week for the Greenback, but it’s certainly worth noting that our proprietary trading strategies have mostly sold into recent Dollar weakness. Until we see a more consistent shift in interest rates and trader sentiment, the US Dollar may indeed continue to trend lower versus major counterparts.

Forex Correlations Summary

View forex correlations to the S&P 500, S&P Volatility Index (VIX), Crude Oil Futures prices, US 2-Year Treasury Yields, and Spot Gold prices.

forex_correlations_Euro_Dollar_to_Treasury_Yields_body_Picture_7.png, FOMC Meeting Critical as Euro/Dollar Correlation to Yields Surges

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

David specializes in automated trading strategies. Find out more about automating Momentum2 and other DailyFX PLUS strategies via Mirror Trader

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