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US Dollar Forecast: Little Relief After April Fed Meeting - Levels for DXY Index, USD/JPY

US Dollar Forecast: Little Relief After April Fed Meeting - Levels for DXY Index, USD/JPY

Christopher Vecchio, CFA,

US Dollar Outlook:

  • The US Dollar (via the DXY Index) has traded higher 10 days in April, while trading lower 11 days. Yet the gauge is still down by -2.75% on the month.
  • Rising US Treasury yields may help cushion the US Dollar in an environment otherwise defined by the Fed’s ultraloose monetary policy and rising inflation pressures.
  • The IG Client Sentiment Index suggests that USD/JPY has a mixed bias in the near-term.

US Dollar’s Lopsided April

The US Dollar (via the DXY Index)’s tough month of April has offered few opportunities for reprieve. The damage to the greenback has been asymmetric: even though the DXY Index has traded higher by 10 days thus far (including today) while falling on 11 days, it is down by -2.75% month-to-date with less than 48-hours to go. It’s been the third-worst April over the past decade, and price action at the end of the month has offered few signs of a sustainable reversal. The turn of the calendar coupled with rising US Treasury yields has a chance to offer a fresh perspective on the US Dollar.

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US Treasury Yield Curve (1-year to 30-years) (February 2020 to April 2021) (Chart 1)

While the US Dollar’s decline for the last few weeks went hand-in-hand with a pullback in US Treasury yields across the curve, the past week has seen US yields steadily creep back higher. Seeing as how falling US yields since the end of March has gone hand-in-hand with a softer DXY Index, the turn higher out of the downtrend offers some hope for greenback bulls.

And yet, there is a fly in the ointment: inflation pressures. With the Federal Reserve just yesterday signaling its intent to keep their main rate low come hell or highwater, the prospect for soft agricultural commodities like corn and wheat or industrial metals like copper to continue to rally in the near-term remains strong. Accordingly, rising near-term inflation expectations may outpace gains in US Treasury yields, which are nominal, thereby exerting downward pressure on real US yields again.

US Dollar bulls should think twice before being lulled into a false sense of safety that rising US Treasury yields will automatically bring about greater fortunes for the DXY Index, even as the calendar turns to May.


Last week it was noted that “viewing current price action through this lens, it would hold that price action in the DXY Index today is not really something for bears to be concerned about yet.” Since then, the DXY Index has broken to fresh monthly lows, achieving them as recently as this morning. Yesterday’s daily candlestick reinforces the bearish technical view, with a bearish outside engulfing bar forming. With losses entrenched at the moment, it remains the case that “the DXY Index is in the throes of a bearish rising wedge formation, which ultimately calls for a return to the February low at 89.68.”

Likewise, the DXY Index remains below the familiar confluence zone 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 US Dollar gauge remainsbelow its daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Daily Slow Stochastics are holding in oversold territory, while daily MACD is trending lower in bearish territory.

The path of least resistance may still be lower yet, until running into rising channel support off the January and February lows; this channel may ultimately prove to be a bear flag.

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In the last USD/JPY rate forecast update, it was noted that “USD/JPY rates have come into a significant enough region of support (cluster of Fibonacci retracements) that may help to stem further losses through the end of the month …if USD/JPY rates turn higher, it’s likely that US Treasury yields are too,” which is what’s played out over the past week: as US yields bottomed on April 22, so too did USD/JPY rates. The turn occurred at the rising trendline from the numerous swing lows throughout January and February, as well as a cluster of Fibonacci retracements just below 108.00.

The picture told by USD/JPY appears divergent from the DXY Index. Whereas the latter appears like it may have more downside potential yet, USD/JPY rates are evidently trying to turn, given the shift out of oversold territory by daily Slow Stochastics and the near-bullish crossover in daily MACD at its signal line. In the event of a potential ongoing broader US Dollar decline, USD/JPY may be one of the few places of solace for USD bulls.

IG Client Sentiment Index: USD/JPY RATE Forecast (April 27, 2021) (Chart 4)

USD/JPY: Retail trader data shows 57.34% of traders are net-long with the ratio of traders long to short at 1.34 to 1. The number of traders net-long is 4.30% lower than yesterday and 3.46% higher from last week, while the number of traders net-short is 4.25% higher than yesterday and 12.75% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/JPY prices may continue to fall.

Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed USD/JPY trading bias.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.