US Dollar Index (DXY) Talking Points:
- The ONE Thing: the US Dollar is working on the highest close since November. To the surprise of many, the move higher in USD is absent a subsequent move higher in US yields. US yields still appear ready for a broader move higher after the softening period ends, but a stronger US Dollar without the support of a key factor shows the broad strength of the move.
- May’s FOMC Minutes will be released later today with a keen focus on whether voting members are concerned about the yield curve or rising back-end of the yield curve, and whether or not that will change their view of how many hikes are needed in 2018.
- Coordinated moves of US Dollar strength across the FX market. EUR/USD broke below the 1.17 marker to trade to the lowest level since November while USD/CNH has broken higher. While many do not necessarily track USD/CNH, the pair at the center of the US-China Trade War appears to have the telling power that should be on trader’s radar. I took a look at a trade set-up here. Bullish USD/CNH on Approaching Trade Talks And Technical Bullish Reversal.
- The 9-day midpoint has been an excellent guide for trend followers to hold their longs and for trend haters not to get too excited that the trend is done. The 9-day midpoint is a key component of the Ichimoku Indicator that I’ve covered in-depth here.
- Access our last DXY forecast here: US Dollar Rides Rising Yields As Institutions Unwind USD Short Positions
Traders sooner-or-later learn that shocks tend to develop in the direction of the trend. On Wednesday, the US Dollar Index posted a bullish reversal near the top of an already extended uptrend. Surprisingly, the move happened absent a move higher in UST 10yr yields, which has guided the USD higher in recent weeks.
EURUSD Kicks Lower (DXY Higher) On Italian Drama
Much of the focus of late that has led to further US Dollar strength seems to be the selling of the EUR in light of Italian anxiety. The anxiety has also been seen between the spread of Italian bonds or BTP’s and the German Bunds. A wider spread has aligned with the stress in the markets as they sell Italian debt, and subsequently, we’ve seen EUR put premiums jump indicating a desire to pay up for protection of a more aggressive decline.
Put simply, the EUR hedge is underway, andtraders are looking for selling opportunities in the market may have found it in EUR/JPY, which recently posted a technical bearish head and shoulders pattern on the back of Italian policy uncertainty.
Will FOMC Minutes Mentions An Inflation Overshoot?
The broad background appears to favor further upside for the US Dollar with real money, orlong-term investor participation may soon be picking up on a deteriorating EUR. Lastly, FOMC Minutes will likely focus on inflation inputs being mentioned but are less likely to rock the boat given the broader risks at hand.
Unlock our Q2 forecast to learn what will drive trends for the US Dollar through 2018!
Earlier this week, I pointed to a stall below 93 as likely temporary given that the DXY continues to trade above the 9- and the 26-day midpoint at 92.77and 92.00 respectively. These points tend to act as strong support with the Ichimoku lagging line well above price from 26-periods ago showing strong momentum.
Not familiar with Ichimoku? You’re not alone and in luck. I created a free guide for you here
RSI(5) may be overbought, but that’s an uptrend for you. From a momentum perspective, traders likely want to be aware of whether or not RSI(5) begins to establish a higher-low. A higher low or higher floor with RSI(5) tends to indicate a technical ‘regime shift’ toward a new trend.
Initial resistance comes in at 94, the 38.2% retracement followed by 94.94, the October/ November high.
DXY Looking Primed to Test 94/94 On Recent Breakout
Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT
Recommended Reading: 4 Effective Trading Indicators Every Trader Should Know
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More For Your Trading
Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q2 have a section for each major currency, and we also offer an excess of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our popular and free IG Client Sentiment Indicator.
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---Written by Tyler Yell, CMT
Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.
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