USD Talking Points
– US dollar index touches a three-month high.
– 2-year German-UST yield spread widens to over 300 basis points.
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USD Likely to Rise Further as Interest Rate Differentials Continue to Bite
The US dollar index (DXY) is back at levels last seen in mid-January with the charts showing a further rise is likely. The latest pull-back in DXY is being powered by rising US Treasury yields ahead of further interest rate hikes in the US. The interest rate sensitive UST 2-year is trading with a yield of 2.48%, while the benchmark 10-year continues its battle to break above 3.0%, a level last seen in December 2013. A break above 3.03% would then see the 10-year at levels last traded back in July 2011. On the charts a gap needs to be filled between 90.66 and 91.46 to confirm ongoing USD strength.
US Dollar Index (DXY) Daily Price Chart (September 16, 2017 – April 24, 2018)
EURUSD Ongoing Weakness
The most-widely traded currency pair, EURUSD, continues to move lower as the rate differential between the two currencies widen. With 2-year German bonds currently trading at -0.56%, the differential between the two has now widened to just over three percentage points (300 basis points), keeping downward pressure on the pair. The US will also auction off $32 billion of 2-year USTs on Wednesday, adding upward pressure on the bond’s yield. On the other side of the pair, the UER may come under fresh selling pressure if ECB President Mario Draghi fails to convince the market that the end of QE is near at Thursday’s ECB policy meeting and press conference. With the latest Euro-Zone data showing growth slowing down and inflation still below the central bank’s target, the ECB may need to keep the bond buying program going on for longer than it initially wanted, keeping the single-currency pointing South.
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EURUSD is now closing in on a gap between 1.21547 and 1.20910, levels last seen in early January this year. Below there, the 200-day moving average sits around 1.20460 which may provide some support in the short-term.
EURUSD Daily Price Chart (October 6, 2017 – April 24, 2018)
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— Written by Nick Cawley, Analyst