Talking Points:
– EURUSD breaks through 1.3335 support and cracks to 1.3290.
– USDCAD, USDCHF flags may signal next USD-pairs to run.
– US Dollar strength in August shouldn’t surprise – it’s a seasonally strong month.
The USDOLLAR Index’s ability to break through and hold above the 10544 level proved to be the spring board we thought it to be last week, propelling it to fresh highs by the greenback against its two largest traded counterparts.
With EURUSD sinking to its lowest exchange rate since September 13, 2013, and USDJPY rallying to its highest exchange rate since April 7, 2014, the US Dollar is well on its way towards breaking out. The US Dollar’s rally in August fits neatly with the seasonal narrative, as the 5-year study called for US Dollar strength across the board in August.
In recent week, falling US yields and the flattening yield curve had little impact on the buck. For much of July and early-August, the 20-day correlation between the DXY and the 2-, 10-, and 30-year US Treasury yields was no more than +0.300 at max, a weak positive correlation.
However, as yields on the long-end have steadied near their lowest levels in a year, and the front-end of the yield curve continues to sell off, the US Dollar has still been able to rally. This speaks to the point that if low yields can’t keep the greenback down, then how strong of a catalyst with higher yields?
If a broad US Dollar breakout is underway, led by EURUSD and USDJPY, then there are still opportunities elsewhere without risking so much ‘chase.’ USDCAD and USDCHF are both lined up in flagging patterns, still working their way towards our measured targets.
See the technical video for considerations specifically for EURUSD, USDCHF, and USDCAD.
Read more: USDOLLAR Index Hits 5-month High after US Housing Surges in July
— Written by Christopher Vecchio, Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
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Source: Daily fx