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Amid what should be a quiet week overall on the economic calendar, the US Dollar is pushing its October highs and its highest level overall since July 20. With much of the focus in the United States on the progress of tax reform legislation, short-end US Treasury yields continue to stay elevated and push higher: the 2-year yield remains near its highest rate since October 2008.
Yet the timing of where the DXY Index finds itself trading into — the July 20 bearish outside engulfing bar that helped define the greenback’s mid-year swoon — can’t be ignored given the recent breakdown in EUR/USD. As 57.6% of the overall DXY, where the Euro goes, so too does the broader dollar guage.
Accordingly, as initially outlined on September 26 and discussed in further detail on October 6, EUR/USD’s head & shoulders topping pattern resulted in a move down to 1.1554, today’s low. While EUR/USD’s technical structure remains very much bearish — price is below the daily 8-, 13-, and 21-EMA envelope, with both MACD and Stochastics trending lower in bearish territory — the combination of EUR/USD’s head & shoulder’s target being hit at the same time the DXY Index is running into key resistance may mean that the greenback’s recent uptrend could be due for a pause.
Chart 1: DXY Index Daily Timeframe (June to November 2017)
Elsewhere, both USD/CHF and USD/JPY retain bullish technical structures thanks to US yields staying elevated (particularly the 2-year yield, which the Bank of International Settlements — the central bank of central banks — has identified as the most influential interest rate along the yield curve in terms of determining currency exchange rates).
In both pairs, price is above the 8-, 13-, and 21-EMA envelope, while MACD and Stochastics are trending higher in bullish territory (above the median or neutral lines). USD/JPY needs to see a break of the May and July swing highs near 114.50 before new long positions are eyed. For USD/CHF, the double bottom target of 1.0108 remains in play following the break through 0.9770 last month.
See the above video for technical considerations in the DXY Index, EUR/USD, GBP/USD, AUD/USD, USD/JPY, USD/CHF, and NZD/USD.
Read more: FX Markets Turn to Asia-Pacific Region for Top Drivers in Week Ahead
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
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