The US Dollar fell across the board following a surge in global risk appetite. Solid corporate earnings by General Electric and a record high in a German confidence survey helped drag the safe-haven greenback lower, triggering a 0.84% loss on the day against a trade-weighted basket of currencies. The Dollar Index (DXY) reversed lower after briefly probing above the key 78.820 pivot, which served as former platform support and the neckline of the latest double top formation.
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Today's bearish price-action also marks the first close below the midpoint of the November advance. The next downside target is 77.842, where the 61.8% retracement lies. If a corrective rally fails to materialize above the broken 50% retracement at 78.538, then the double top target could be in the cards. Ironically, this measured move coincides with long-term trendline support that originates from the all-time lows. Moreover, this would also equate to a retest of critical support at 22 for the Dollar Index ETF (UUP).
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While a weekly bearish engulfment pattern was confirmed with this week's follow-through weakness, there is a glimmer of hope for dollar bulls. Often when price-action closes at the lows of the week, it is often representive of a short-term selling exhaustion. Also, the latest CFTC Commitment of Traders report demonstrated that euro speculators had flipped to a small net-long position earlier in the week. This suggests the completion of short-covering for the EUR/USD and could limit gains in the near-term.
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Meanwhile, the highly correlated 2-year EU/US yield gap tested the November high before consolidating for the remainder of the North American session. A move above the +68 basis point differential would mark a fresh 2-year high in the EU's favor. As such, the euro should continue to outperform while european peripheral yield spreads narrow and yield differentials vs. the US continue to widen.
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