The Dollar Index has fallen into heavy weekly support so it is hardly a surprise from a technical perspective to see a bounce here. Just look at the heaviness of the support on the weekly chart would tell you a small bounce would be in order in pretty much any market. The key catalyst for the bounce higher is the rising US10 Y yields. As yields rise a countries currency tends to rise too. Rising yields = coming interest rate rises = stronger currency. An obvious cap to the US 10Y rising yields is seen at 1.25%. This level should cap any further yield gains and that rate will likely find some US10 Y bond buyers keen to hedge in some gains against an equity fall. 1.25% in US10Y is not bad by recent standards.
For all the market chatter of the ‘crowded USD trade’ some profit taking makes sense at the 89.00 level on the Dollar Index. The reason for the crowded short USD trade is that there are some very good reasons to short the USD. Seeing a bounce on the DXY is expected. Being short the Dollar index into last year’s end the obvious target for sellers was into this present weekly support level the Dollar Index has just fallen into. Check out the stats here for the seasonal USD weakness. Year end tends to see USD outflows for US taxation reasons:
A natural retracement would only be normal market movements. Next near term resistance marked on the chart with the major trendline above at 93.00. The break higher last week indicates that there is a potential trend shift in the Dollar Index indicating a retracement at the very least.