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Talking Points:

-Dollar Technical Strategy: rebound after six-weeks of new lows may be running out of steam

-Previous Post: Dollar Technical Analysis: You Should Watch This DXY Bounce

-Broader trend still higher, but doubts mount as bullish fundamentals don’t push price up

-If you’re looking for trading ideas, check out our Trading Guides

The US Dollar appeared to have everything going for it on Wednesday, but you would not know that by looking at the price. The Consumer Price Index surpassed economist’s expectations, which pushed higher the probability of the next rate hike in March to 42% as of Wednesday afternoon. Janet Yellen, in her testimony to Congress also continued her tone from Tuesday that appeared more hawkish than recent testimonies to Congress, but none of this was able to keep the DXY bid.

The trend in positive economic news developments in the UShasbeen visualized in the Citi Economic Surprise Index for the USD. Citi’s Surprise Index places a value on actual news releases relative to economists expectations, and the move higher from -20 in October to currently over +40. The rise in this index helps to visualize why the fall in Treasuries as investors and traders prepare for higher yields due to Federal Reserve action of raising interest rates. On Wednesday, the 2yr Treasury Yield traded at 2017 highs as the on the run issues were sold off. Since the election in November, there has been a strong positive correlation between the USD and the US 2YR Yield, but that may be breaking down.

It’s too early to tell, but it should be noted that it is possible the the USD has simply been unable to keep up with all the expectations placed on it following the election. Even Janet Yellen has voiced a concern or doubts about the ability of all the fiscal programs promised by President Trump to be enacted as well as voiced concern over proposed and some passed immigration policies could have on destabilizing the “full” employment market.

Despite this week's positive developments, the DXY failed to hold the bid that many likely anticipated. In our last technical note on the DXY, we noted that the recent bounce was important to watch, and the bounce itself should not be surprising. The bounce is important to watch because it happened at a confluence of support but should not have been surprising because after six straight weeks of new lows starting in late December, a bounce, even a tepid one is expected.

Looking at the chart below, the most important component is that the overall trend since mid-2016 is higher and the bias should overall be given to the Bullish view. In other words, the burden of proof still rests largely on the shoulder of the Bears despite the USD being the weakest G8 currency over recent weeks.

Regarding the potential for Bearish continuation of the 2017 trend, you should also note that we look to be making lower highs on the RSI(5) on the Daily Chart, which could show that we’re continuing to get less momentum behind the Bullish moves that could open up the view that we’re about to see a breakdown. If we break below the February low of 99.23, it’s fair to say that a larger breakdown is upon us.

What will likely be a painful new experience to many is that the breakdown (should it develop) could take place among a hawkish Fed or an environment of rising interest rates. The markets are a world built upon expectations, and it could be that the expectations became too much for the USD to live up to. We’ll have to wait for the next big move to build a firmer bias on this view.

For now, we’ll watch the three key zones of resistance. The main forms of resistance, for now, are the Fibonacci zone that comprises the 61.8-38.2% retracement of the 2017 range that occupies 102.07-100.99. We’re currently trading in that zone now, and a break above this zone could show that the broadertrend is soon to resume. A hold of resistance here along with the other forms of resistance, which are comprised of the Median Line of the rising pitchfork (LT Bullish) and the Daily Ichimoku Cloud followed by a break below the 99.23 February low would turn the focus definitively lower.

You may find it helpful to remember that the Median Dot Plot forecast at the December FOMC for the Fed to hike in 2017 was three hikes, anything that falls short of that and that sheds doubt on the potential inflation-inducing policies of President Trump could weight on the USD. In addition to the inability of the USD to support the momentum that it rode into 2017 on is the relative strength that is appearing from Europe & Japan.

There are major elections coming up in Europe that could have long-lasting political ramifications, but if the European yield curve continues to steepen as it has lately, there could be evidence that the future inflation in Europe that many thoughts had no chance of showing up is arriving.

These themes are not tradable yet, but should be watched as there are a multitude of ramifications here, least of which would be ECB tapering that could lift EUR. However distant, these possibility aligning with DXY price action should be watched.

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Dollar Technical Analysis: YTD Highs In 2-Yr Yields Fail To Lift DXY

Chart created by Tyler Yell, CMT

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Shorter-Term DXY Technical Levels for Wednesday, February 15, 2017

For those interested in shorter-term levels of focus than the ones above, these levels signal important potential pivot levels over the next 48-hours of trading.

Dollar Technical Analysis: YTD Highs In 2-Yr Yields Fail To Lift DXY

T.Y.