It has seemed as though the US dollar (USD) has suffered from a hangover in recent weeks. Has the recovery party over for USD come to an end already? A downside move on USD has come as US bond yields have halted their rise and begun to fall back. This is despite readings of strong economic data out of the States. Technical analysis of key major forex pairs suggests the dollar struggles are not done yet.

  • Falling US bond yields are pulling USD lower. If this move persists, then the dollar selling pressure will continue.

  • Strong US data has failed to ignite USD positive moves.

  • Major forex pairs show USD selling continues. 

Bond yields have fallen, weighing on USD

During the dollar rally of the Q1 this year, the move was driven by rising US bond yields. The positive correlation between USD and the US 10 year Treasury yield has been strong for much of 2021. However, as the 10yr yield has decisively fallen back recently, we have seen USD also weakening.

Chart/Dollar Index

To consider the direction of USD, the positive correlations with “real bond yields” (ie. bond yields adjusted for inflation) gives a good indication. Real yields (still deeply negative c. -0.75%) recently fell back to their lowest since the end of February. The correlation has been positive with USD (above zero) for much of the past year (averaging c. +0.35 which is considered to be a solid positive correlation).

Chart/US 10 year Treasury yield/US Dollar

If “real yields” continue to fall, USD will remain under pressure.

US data is failing to support USD

What has been notable this week is that there has been a shift in sentiment for USD. Despite US consumer price index inflation rising more than expected, we saw USD being sold off. Furthermore, stellar US Retail Sales for March also failed to ignite USD buying yesterday. This is a change from what we have seen throughout 2021.

This could be because the market has priced in much of the USD recovery. Markets have been positioned for higher yields and a USD rebound, but this has been a crowded trade in recent weeks. 

The 10 year yield fell sharply below 1.59% yesterday. Hugely strong retail sales should help to drive yields higher, so this is counter to what we would expect. 

Chart/10 year yield

USD was also under selling pressure. Watching how USD now responds to strong US data will be interesting. Support at 91.25 on the Dollar Index is now crucial. 


Resistance around 1.1990 is crucial on EUR/USD

Traders will certainly be watching what this all means for EUR/USD. The resistance at 1.1990 from the first couple of weeks in March is now crucial. This is the first key lower high of the sell-off. If this is broken then it would signal a big shift in sentiment. Resistance at 1.2020/1.2050 would then be the next barrier.


Support at 108.35 is key on USD/JPY

A weakening dollar has pulled USD/JPY lower and is now within touching distance of key support at 108.35. Importantly, we have seen the Relative Strength Index (RSI) back under 50, reflected a growing deterioration in momentum. If there is another lower high under 109.35 then the pressure will mount for a potential breakdown of 108.35. A closing breach would open 107.00 as the next key support area.