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US Dollar Forecast: Turn Higher May be Stymied if US Yields Do Not – Levels for DXY Index, USD/JPY

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US Dollar Outlook:

  • The US Dollar (via the DXY Index) is trading higher on the day for just the sixth time in April.
  • In fact, even though April is the worst month of the year for the DXY Index, April 2021 is on track to be the third worst performance for the month over the past decade.
  • The IG Client Sentiment Indexsuggests that USD/JPY has a mixed bias, though more losses are still possible.

US Dollar Catches a Break, Sort Of

The US Dollar (via the DXY Index) has had a tough month of April. If current price action is maintained through the close, it will be just the sixth day this month that the gauge of greenback strength has managed to finish in positive territory. To put this performance in perspective, consider the DXY Index’s seasonal tendency: April has been the worst month of the year. But April 2021 is particularly brutal, having thus far carved out its place as the third-worst April we’ve seen since 2011 – and there’s still time left in the month.

US Treasury Yield Curve (1-year to 30-years) (April 2016 to April 2021) (Chart 1)

US Dollar Forecast: Turn Higher May be Stymied if US Yields Do Not - Levels for DXY Index, USD/JPY

The tendency for a weaker US Dollar in April has been buttressed by US Treasury yields, across the curve, moving lower. Seeing as how falling US yields since the end of March has gone hand-in-hand with a softer DXY Index, the lack of traction to the topside in the US yields space draws into question the ability of the DXY Index to sustain its meager rebound. If US Treasury yields are unable to turn higher in a material fashion, the seeds of a rebound being planted today may end up being drowned out rather quickly.

DXY PRICE INDEX TECHNICAL ANALYSIS: DAILY CHART (March 2020 to April 2021) (CHART 2)

US Dollar Forecast: Turn Higher May be Stymied if US Yields Do Not - Levels for DXY Index, USD/JPY

One week ago, it was noted that “the US Dollar (via the DXY Index) continues to trade lower after losing the uptrend from the February and March swing lows. It’s possible 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. Bolstering the view for a deeper setback has been the return back into the rising parallel channel dating back to December 2020; this may be a failed bullish breakout attempt.”

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. After all, 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.

Moreover, the DXY Index 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 breaking down through its signal line. Confirmation for a deeper setback has emerged, and the bearish rising wedge may still be the predominant technical force in markets.

USD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to April 2021) (CHART 4)

US Dollar Forecast: Turn Higher May be Stymied if US Yields Do Not - Levels for DXY Index, USD/JPY

In the prior update it was noted that “USD/JPY rates have lost their uptrend from the late-February and March swing lows, and concurrent to the setback in US Treasury yields and an otherwise bearish seasonal tendency for the pair, the groundwork may have been laid for further losses…if USD/JPY rates are struggling, it likely means that US Treasury yields aren’t climbing, which has been the backbone of broad greenback strength in recent months.” US Treasury yields have continued to fall, and USD/JPY rates have followed them lower.

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, at which point the rising trendline from the January, February, and March swing lows comes into focus. Support may be challenged yet again given the bearish propensity of momentum indicators. It would hold that if USD/JPY rates turn higher, it’s likely that US Treasury yields are too, which would be a good omen for the broader DXY Index.

IG Client Sentiment Index: USD/JPY RATE Forecast (April 20, 2021) (Chart 5)

US Dollar Forecast: Turn Higher May be Stymied if US Yields Do Not - Levels for DXY Index, USD/JPY

USD/JPY: Retail trader data shows 49.02% of traders are net-long with the ratio of traders short to long at 1.04 to 1. The number of traders net-long is unchanged than yesterday and 4.88% higher from last week, while the number of traders net-short is unchanged than yesterday and 2.31% lower from last week.

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

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