As a follow up to last week, we maintain our medium term bullish USD view especially against European currencies, but we see a need for caution in the short term as our roadmap from 1999 remains intact. In addition, it’s important to note that the move higher in the USD does not need to happen in lock step with US yields.
Most important to remember, though, is that this overall dynamic is likely to be short-term in nature. The DXY rally tends to resume and accelerate as the bond market sell-off matures. This makes sense as foreign investors would likely see the combination of higher yields and possibility of price appreciation as sufficiently attractive to get back “in the game.”
In the short run, we continue to expect EURUSD and GBPUSD to test major resistance levels, which again, is consistent with our roadmap from 1999, before turning again later
EURUSD has sustained above the 55 day moving average with a decent gap to the 200 day which currently stands at 1.1017 which is 2.5% above current levels
For GBP/USD, we have taken out the reverse head and shoulders neckline, the 55 day moving average and the previous falling trendline which all converged between 1.2406-1.2415. This break suggests a rally to 1.2842 which would be the reverse head and shoulders target. Good resistance levels are at 1.2775-1.2798
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