US Dollar Forecast: DXY Runs Higher Even as US Yields Lag - Setups for DXY Index, USD/JPY
US Dollar Outlook:
- The US Dollar (via the DXY Index) has traded to a fresh yearly high, even though US Treasury yields remain, by-and-large, rangebound.
- The economic calendar this week is backloaded with US data, in particular, the March US nonfarm payrolls report which could show jobs growth close to +700K.
- The IG Client Sentiment Index suggests that USD/JPY has a bearish bias.
US Dollar Gains, but Catalyst Proves Lacking
Higher US Treasury yields have been the typical precursor to US Dollar strength in recent weeks, but the greenback appears to be doing fine on its own (for the most part). Even as long-end US Treasury yields have stalled out over the past two weeks – really, since the March Fed meeting when Fed Chair Jerome Powell more or less told bond vigilantes to go take a hike – the greenback (via the DXY Index) has been able to climb higher.
US Treasury Yield Curve (1-year to 30-years) (March 2016 to March 2021) (Chart 1)
Indeed, the DXY Index has established fresh yearly highs today, and if US Treasury yields are on the verge of resuming their climb, then the US Dollar may be poised for more gains. If the recent consolidation in US Treasury yields coincided with a period of disappointing US economic data, as evidenced by the Atlanta Fed GDPNow growth forecast for 1Q’21 dropping from +10% annualized at the end of February to +4.7% as of March 26, then the arrival of the March US jobs report at the end of this would may harken a turnaround in US growth expectations, and thus, US Treasury yields once more.
DXY PRICE INDEX TECHNICAL ANALYSIS: DAILY CHART (March 2020 to March 2021) (CHART 2)
In the most recent US Dollar forecast update on March 17, it was noted that “a move over the mid-February swing high of 91.06 would suggest that the turn higher is gaining legitimacy…now back below the initial intrayearly uptrend, DXY Index may be in for more choppy trading in the near-term.” The choppy trading played out for a few days before the DXY Index pivoted higher from the confluence of support and resistance going back to late-July 2020, as well as the 23.6% Fibonacci retracement of the 2018 low/2020 high range and the 38.2% Fibonacci retracement of the 2011 low/2020 high range.
The push to fresh yearly highs today comes alongside improving bullish momentum in recent days. The DXY Index is above its daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily Slow Stochastics are holding inoverbought territory, while daily MACD is trending higher above its signal line. More gains may be ahead, particularly at the tail-end of the week, where US economic data is stacked.
USD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to March 2021) (CHART 3)
In the prior USD/JPY forecast update on March 17, it was noted that “more gains may be ahead soon for USD/JPY rates after some profit taking.” A period of sideways movement ensued, with USD/JPY trading back to its daily 21-EMA before eventually turning higher. Gains the past few days have been aggressive, and price action today is resolving itself in a manner that may see USD/JPY rates close above several key technical levels: first, the 76.4% Fibonacci retracement of the 2020 high/low range; second, the 61.8% Fibonacci retracement of the 2018 high/2020 low range; and the June 2020 high.
USD/JPY rates are above their daily 5-, 8-, 13-, and 21-EMA envelope, which remains in bullish sequential order. Daily Slow Stochastics are trending higher back into overbought territory, while daily MACD has started to turn back higher after a small pullback after reaching its 52-week high. The path of least resistance may be higher, perhaps gilded by the stacked US economic calendar at the end of the week.
IG Client Sentiment Index: USD/JPY RATE Forecast (March 29, 2021) (Chart 4)
USD/JPY: Retail trader data shows 40.45% of traders are net-long with the ratio of traders short to long at 1.47 to 1. The number of traders net-long is 7.69% higher than yesterday and 14.33% higher from last week, while the number of traders net-short is 0.20% higher than yesterday and 5.70% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/JPY prices may continue to rise.
Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current USD/JPY price trend may soon reverse lower despite the fact traders remain net-short.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.