US Dollar Countertrend Rally Ahead – Watch Yields And Copper

After losing 12% since beginning of this year, the Dollar Index has become heavily oversold and we expect a significant countertrend rally in the weeks ahead. On a daily timeframe we already have a bullish divergence in place while on the weekly chart, the RSI is not far from a bullish signal.

Following Wednesday’s Fed meeting, the interest rate differential between Euro and Dollar should continue to increase. Also, despite Merkel winning the German elections is widely expected, we would not be surprised to see profit taking in the Euro following this weekend’s elections (buy the rumour, sell the fact…), especially as Euro long positioning has reached extreme levels.

We expect EURUSD to correct towards 1.14/1.12, the 38.2% and 50% retracement repectively. Remember, 1.14 was strong resistance between May 15 and May 16.

Keep an eye on U.S. yields. While the 2 year yield is already trading at the highest level since late 2008, 10 year yields are lagging. Following the sharp rally that took place between July 16 and March 17, they have retraced nearly 50% of that move. We expect them to break the March 2017 downtrend and to move towards 2.60 again.

A rising US dollar and rising yields will very likely weigh on commodities such as copper, which is already correcting. Considering the strong rally of the past few months, we view the current weakness as very healthy. While it is very important to understand that we only expect the dollar rally to be a countertrend rally and therefore to be temporary, commodity related stocks are likely to underperform while financials and export driven European stocks should outperform in the coming weeks.

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