Two events have occurred over the last 24 hours that could trigger another leg higher for the dollar:
1, The BOE has back-tracked from an early rate increase and now it may not be the first of the major central banks to hike interest rates. This has weighed heavily on the pound.
2, German yields have fallen to record lows as the market prices in the prospect of QE from the ECB after German GDP contracted in the second quarter. The 10 year yield fell below 1% for the first time on record, and 2-year yields remain in negative territory. This could weigh on the euro in the long-term.
This has pushed the German – US yield spread deeper into negative territory, and this morning the UK –US yield spread fell into negative territory (see more about GBPUSD here), which are both bullish developments for the greenback.
This is significant for the dollar since the performance of EURUSD and GBPUSD have a major bearing on the greenback. The dollar index is approaching some key resistance levels including:
The top of the most recent range at 81.70 from 6th August
The top of the weekly Ichimoku cloud at 81.87. (See figure 1)
A break above the 81.70 – 81.90 resistance zone would be a medium-term bullish development that could trigger further gains.
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