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Rising US Yields Building Base for USD, but Don't Dismiss EUR Rally

Rising US Yields Building Base for USD, but Don't Dismiss EUR Rally

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- Euro-Zone data mixed, UK data beats; all European currencies gain versus Dollar.

- ECB needs to take decisive action to keep common currency from rallying.

- US yields softer overnight, but rise past week encouraging ahead of NFPs.

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(vs USD)








Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.12% (-0.20% prior 5-days)


The US Dollar is broadly lower on the day as risk appetite firmed on the back of improving data in the Asian and European trading sessions. Of note, the European currencies have started to perk up in recent hours against the buck, coinciding with slightly softer US Treasury yields on the day.

However, a look at recent changes in US yields suggests that a base may be building for the US Dollar:

Rising_US_Yields_Building_Base_for_USD_but_Dont_Dismiss_EUR_Rally_body_Picture_1.png, Rising US Yields Building Base for USD, but Don't Dismiss EUR Rally

While the 1-day change in US yields has aided US Dollar weakness, it’s clear that the tone has clearly improved for the buck over the past weeks. After being negative for the past several weeks, the rolling 1-month change in US yields is essentially flat across the curve, suggesting improving risk appetite in the wake of the US fiscal deal. Furthermore, US yields particularly on the long-end (7Y-30Y) have risen over the past week, implying that recent US data has started to stir speculation over a December Fed taper.

The rise in US yields, however, hasn’t led to an upswing in the US Dollar, which is down by -0.20% over the past 5-days. Before the US Dollar reacts to rising yields – and gets a boost against its major counterparts – a significant fundamental catalyst, like a better than expected NFP print on Friday, is necessary.

The EURUSD, however, may not be the ideal candidate to extend its recent losses should NFPs beat on Friday, considering there are two big obstacles first: the European Central Bank meeting tomorrow; and the 3Q’13 US GDP print tomorrow. Of these, the ECB meeting is likely to be the main driver in the EURUSD the next 24 hours.

EURUSD Hourly Chart: October 22 to Present

Rising_US_Yields_Building_Base_for_USD_but_Dont_Dismiss_EUR_Rally_body_x0000_i1028.png, Rising US Yields Building Base for USD, but Don't Dismiss EUR Rally

Ahead of tomorrow’s ECB meeting, the EURUSD is trading in a sideways channel between $1.3440 and 1.3540. The pair is supported by the rising TL off of the July and September lows, suggesting that we’re at a ‘make or break’ level for the pair: the possibility of a rebound is just as likely as a breakdown from here.

Accordingly, we’re looking for this range to guide expectations for the ECB meeting: a break through 1.3540 would suggest that the ECB won’t implement new dovish policy measures, allowing for a short-covering rally after last week’s meltdown; or a dive through 1.3440 should occur if a rate cut or other substantive easing measures are undertaken.

With EURUSD overnight implied volatility at its highest level since May, a break of this recent range over the next day should be eyed.

Read more: Pound Joins Euro Slide, Drops against US Dollar - $1.6000 in Question


Rising_US_Yields_Building_Base_for_USD_but_Dont_Dismiss_EUR_Rally_body_x0000_i1029.png, Rising US Yields Building Base for USD, but Don't Dismiss EUR Rally

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--- Written by Christopher Vecchio, Currency Analyst

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