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Yield Differential Buoys Dollar

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Yield Differential Buoys Dollar

The yield differential which governs the movements of the forward curve has allowed the dollar to gain momentum in 2014. Monday’s price action saw the Euro gain a little ground but he overwhelming direction has been in favor of the green back. Monday’s stronger than expected PMI data helped the Euro edge higher, but yields in the US are likely to continue to back up making it difficult for currencies to benefit against the dollar.

In Europe, the December service PMIs came roughly at expectations, though those from Germany and especially the UK were a on the weaker side. On Tuesday, the preliminary December CPI will be announced. The year over year rate is expected to be unchanged from the November reading of 0.9%. In December 2012, it stood at 2.2%. Retail sales are expected to have risen by 0.3% in November from a year ago.

The economic highlight of the week is the US monthly jobs report. Prior to the release investors will view the private payroll report released by ADP. A stronger than expected number will keep yields on the defensive allowing the dollar to gain traction.


The Euro declined during the Asian session testing support near a long term moving average which is an upward sloping trend line that connects the lows made in November 2012 to the lows made in November 2013. The support level comes in near 1.3580. Resistance on the currency pair is seen near the 10-day moving average near 1.3695. Momentum remains negative as the MACD (moving average convergence divergence) index generated a sell signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses below the 9-day moving average of the spread. This RSI (relative strength index) is printing near 44 which is in the middle of the neutral range and reflects consolidation.

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