DXY Trying to Bottom; Watch EUR/USD, Not USD/JPY- Positioning in both EUR/USD and GBP/USD is rapidly shifting, suggestin

DXY Trying to Bottom; Watch EUR/USD, Not USD/JPY- Positioning in both EUR/USD and GBP/USD is rapidly shifting, suggestin

7 February 2017, 14:33
Mohammad Soubra

DXY Trying to Bottom; Watch EUR/USD, Not USD/JPY


 Talking Points:

- Both EUR/USD's and GBP/USD's declines today are fueling the DXY Index's attempt at breaking the downtrend from January 3.

USD/JPY is on uncertain ground ahead of the Trump-Abe meeting this Friday; may be the outlier among USD-pairs.

- Positioning in both EUR/USD and GBP/USD is rapidly shifting, suggesting more US Dollar gains - see theDailyFX Speculative Sentiment Index.

The US Dollar (via DXY Index) is once again attempting to bottom, putting in another try to break the trendline from the January 3 high. There are several factors that may be feeding into the greenback's increasing appeal today, including speculation over the timing of the Federal Reserve's next 25-bps rate hike: Philadelphia Fed President Patrick Harper said that he thinks "March is on the table," while noting his support for three rate hikes this year (currently, Fed funds futures only have two priced in, for June and December).

Yet this hawkish appeal is only a small piece of the puzzle. Indeed, as the largest component of DXY, theEurois front and center (57.6% total weighting). Two developments thus far today have the Euro reeling. First, as we pointed out yesterday, Greek bond yields have continued to shoot higher, with the 2-year yield near 10%, as questions over whether or not the IMF will stay in the Greek bailout program persist. As German FinMin Wolfgang Schaeuble's spokesman Juerg Weissgerbermade clear yesterday, if the IMF were to pullout of the Greek bailout, "then the program is over."

Elsewhere, in terms of the economic docket, while largely absent of 'high' rated events this week, the data that has been revealed for the Euro has been rather disappointing. Even though the data is a bit stale - it's for the December reporting period - it still carries weight. German industrial production unexpectedly fell by -3% from November, culminating in a -0.7% performance year-over-year.

While the German Economy Ministry said that the figures may be attributed to the compilation methodology - thus having no impact on the ministry's otherwise positive growth assumptions for 2017 - one can't help but feel that the protectionist wave sweeping across the world's developed economies will inevitably hit Germany, Europe's largest economy, particularly if US President Trump takes aim at what he considers to be an artificially cheap Euro (there may be a point: PPP suggests EUR/USD should be trading closer to 1.3000).

For traders, it's worth paying more attention to EUR/USD, and say, GBP/USD, than it is to pay attention to USD/JPY over the coming days. With the Trump-Abe meeting set for Friday - and theJapanese Yenbeing one of the three currencies President Trump has lambasted (the others being the Euro and the Chinese Yuan) - it seems that any additionalUSDstrength will find more welcoming conduits elsewhere. Both EUR/USD and GBP/USD have seendramatic shifts in positioning over the past weekwhich cater to the idea that more US Dollar strength may be on the horizon.


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