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Dollar Gains Traction as US Yields move Higher

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Dollar Gains Traction as US Yields move Higher

The dollar regained some ground on Thursday against the yen, although it continued to have a difficult time against the Euro and the Pound. Both the ECB and the BoE met on Thursday but neither responded with any action. Yield differential continue to favor the dollar over the yen and it should be clear to investors that while the US is tapering its accommodation while Japan continues to ratchet up their efforts.

China’s CPI came in on the low side at 2.5% in December. The easing of consumer inflation should underscore that the PBOC is not in a hurry to tighten policy and indeed, money market rates continue to unwind the year-end climb. The number was highly anticipated by failed to drive the USDJPY significantly higher.

Both the BOE and ECB met Thursday and left interest rates unchanged. When the BOE does not move, it sees no need to discuss it. Draghi made a statement and continues to deliver a dovish message. The ECB president recognizes the downside risks to growth forecasts as the economic recovery remains weak. Like most other ECB officials, Draghi is likely to play down the risks of deflation and he may note that inflation expectations remain stable.

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The USDJPY edged toward resistance near 105, holding up against support near the 10-day moving average. One issue is the divergence that is taking place where prices on the currency pair are moving higher but the MACD (moving average convergence divergence) index is printing in negative territory after generating a sell signal. This divergence should be watched carefully as prices could quickly move lower in the direction of downward momentum. The RSI (relative strength index) is printing near 62, which is the upper end of the neutral range.

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