After a brief rally last week, the US dollar (USD) is coming under renewed downside pressure. A key driving force is the continued positive correlation with falling “real” bond yields (US bond yields minus inflation). This is impacting across major forex pairs. Whilst the trading ranges that have built over recent weeks remain intact for now, this renewed USD selling looks set to test these ranges.

  • Whilst Treasury yields struggle to find positive traction USD will remain under pressure

  • Renewed USD selling is driving moves on major forex, with EUR/USD eyeing key resistance at 1.2150

  • GBP/USD looks set to test 1.4000 resistance again

  • USD/CAD has fallen to multi-year lows

USD selling as yields struggle and rising inflation weighs on “real yields”

Last week’s USD technical rally (which reversed previous April selling) came to an end decisively yesterday. This drive back lower has continued in the European session this morning, even ahead of Non-farm Payrolls (where there is traditionally a consolidation ahead of the data). A move back towards a test of the 90.42 low on the Dollar Index now looks on.

Chart/Dollar Index 

This renewed selling pressure is born out of the bond market (as so often is the case). Treasury yields are struggling in a range. The US 10 year yield is stuck in a 30 basis points range between 1.48%/1.78%. This is one of the factors why major forex pairs have been ranging over recent months.

Chart/US 10 year yield

However, this is also coming as expectations of inflation are rising. This is pulling the US “real yield” lower. The real yield has been channeling lower since early April. 

Chart/10 yield

This fall in the “real yield” is why USD is weakening. Note the consistent positive correlation between USD and real yields in the chart below. If inflationary forces continue to rise then USD will remain under selling pressure.

Chart/Dollar Index

EUR/USD eyeing a test of 1.2150 key resistance

This is all impacting through forex majors, as USD is weakening.

On EUR/USD, an important level of technical support around 1.20 held this week. The subsequent buying pressure on the pair (driven mostly by USD selling) is now eyeing the key resistance at 1.2150.


Importantly too, momentum is also confirming this new positive outlook, with the Relative Strength Index (RSI) holding above 50. If USD continues to be sold then we are looking for a breakout above 1.2150 and a test of the key resistance band between 1.2185/1.2240.

GBP/USD edging higher for a test of 1.4000 again

GBP/USD is also pulling higher. The Bank of England fired the starting gun on its tightening cycle yesterday with a technical taper which we see as GBP positive. Coming with USD weakness, we see pressure back on 1.3975/1.4000 key resistance. 

With the primary uptrend intact and positive bias on momentum we look to buy into weakness for the test of 1.4000.


CAD is the standout performer, USD/CAD falling to multi-year lows

However, these other moves are nothing compared to the drive lower on USD/CAD (i.e. a strengthening Canadian dollar). Yesterday we saw USD/CAD with a huge downside break of the downtrend channel, moving to the lowest level since September 2017. 

The next real support is 1.2055 which is the September 2017 low. Below that is the May 2015 low of 1.1915 and then we are talking about support in the 1.13/1.15 area.

Although the strength of the trend is significant, the RSI is around 30 which is getting stretched. We would be looking to use any technical rally into 1.2260/1.2360 resistance as a chance to sell.