Talking Points:
- EUR/USD[1] suffered its worst drop of the year yesterday following the ECB's dovish taper of its QE program.
- The DXY[2] Index rally has run into resistance at the 2018 high, as well as the swing highs in July, October, and November 2017.
- Retail traders[3] are once again net-short the US Dollar across the board, a contrarian bullish signal.
Looking to learn more about how central banks impact FX markets? Check out the DailyFX Trading Guides[4].
US Dollar Rally Hits Pause at Yearly High
The US Dollar (via DXY Index) has rallied to its highest level of 2018 following the trio of central bank meetings this week, the Federal Reserve on Wednesday, the European Central Bank yesterday, and the Bank of Japan today.
Policy divergence is clearly in the spotlight, as the Fed plans on pushing forward with a 25-bps rate hike every three months through the end of 2019, while both neither the ECB nor the BOJ expected to raise rates at any point over the next year. The earliest a tightening move is being priced in for either the ECB or the BOJ comes in September 2019, by which point the market is already pricing in at least four more Fed rate hikes.
DXY Index Price: Daily Timeframe (August 2017 to May 2018) (Chart 1)
The stark realization of the policy divergence yesterday produced the best day of the year for the US Dollar and the worst one for the Euro[5]. The DXY Index today was able to briefly move back to its yearly high, resistance that coincides with the swing
