Just as it looked as though the US dollar was embarking upon a decisive recovery, Friday’s Michigan Sentiment disappointment has broken a recovery in bond yields and the Dollar Index. Forex major pairs now run the risk of being stuck in a series of trading ranges once more. 

  • The US 10 year yield and US Dollar Index are both now stuck in questionable positions for their respective recoveries.
  • Previously underwhelming safe-haven major forex plays are picking up once more.
  • Elsewhere we see trading ranges dominating major forex.


Recoveries on Treasury yields and USD are now being questioned

With a hugely encouraging payrolls report and increasingly hawkish noises coming out of FOMC members, we have seen rising bond yields and a strengthening US dollar (USD). However, suddenly, these recoveries are being questioned in the wake of one of the worst deteriorations in Michigan Sentiment on record. 

The US 10 year yield falling back under 1.30% has nipped a recovery in the bud, which has also pulled USD lower. For bonds, two technical factors will worry traders looking for higher yields. The rebound that failed around 1.38% came just under the old primary uptrend, along with what seems to be the continuation of a 3 month downtrend. Put simply, is this simply part of a growing negative trend.



Rising yields are supportive for the dollar. The other concern for USD bulls will be the Dollar Index chart as resistance has formed at 93.19. This strengthens the barrier to further upside between 93.20/93.45 that has been seen throughout this year. 

Although Dollar Index is in the upper half of what we see as a 9 month trading band (89.20/93.45), it seems now to be settling into a 2 month range between 91.50/93.20. The bulls will be looking to build from the support of a near term pivot that is forming around 92.40/92.50, but the upside traction seems to be limited right now.



Safe-haven forex picking up once more, levelling off


With the massive deterioration in consumer sentiment in the US, the bulls have been knocked back. Subsequently, we are seeing safe-haven forex bouncing back in the past few sessions. However, this bounce back is simply levelling off previous underperformance.



From the chart of relative performance versus the dollar over the past four weeks, we see that the safe-haven majors (EUR, CHF and JPY) have all picked up off the bottom of the chart in the past week. There is a lack of any real trend anywhere amongst the major currencies. This would suggest that for trading strategies, taking advantage of near term moves, with shorter time horizons on positions (three to four days max) is proving to be profitable right now. 


A moment of consolidation in major forex, for now


Looking at the major charts we see themes developing:

  • USD strength versus EUR, GBP has been unwound. A key crossroads is approaching.
  • Commodity currencies are now ranging, but recoveries are still yet to kick in.

Looking at both EUR/USD and GBP/USD there has been a kickback against the recent USD strength. This has unwound them back towards downtrend resistance. Is this an opportunity or a time to wait? 

For EUR/USD the downside pressure looks greater. Technically, the outlook is set up to sell into strength with RSI unwound into the mid-40s. How the market reacts around resistance between 1.1800/1.1850 will be key.



Technically, GBP/USD looks a less negative, but the downtrend pressure is still in play. The RSI is more mixed, around 50 and there is support now forming 1.3730/1.3800. Once more the reaction around the downtrend will be key. A close above 1.3890 would begin to improve the outlook but resistance between 1.3960/1.3980 is mounting. For now though, there is enough doubt to question the move either way.



All of AUD, NZD and CAD are showing mixed outlooks against the USD now. Having broken previous multi-week trends, there is a sense of consolidation. However, with the Reserve Bank of New Zealand primed for an increase in interest rates this week, our preferred pick for a positive move versus USD is the Kiwi (NZD). 

NZD/USD has broken the downtrend, and is now forming higher highs and higher lows. Improved momenutm outlook adds to the hints of improvement. Resistance at 0.7070/0.7100 stands in the way of continued recovery. For now though consolidation is set.



Conclusion

The outlook for forex major pairs have become far more mixed as a USD recovery has faltered. For now, there is a series of ranging formations. We are on the lookout for any key breaks though.