Capital markets are forward-looking discounting ‘machines’ and investors seek to price in future developments. Interest rate differentials are one of the most important drivers of currency movements and any serious investor/trader should be aware of key developments in the interest rate differentials. The below weekly chart shows that the spread between the US 10Yr yield and German 10Yr yield is at a CRITICAL support level after the spread has been narrowing since the end of last year. Should the spread continue to narrow then expect the USD to remain under pressure. Furthermore, we are watching the longer term charts of the EURUSD and the USDCHF very closely for confirmation of USD direction as the two pairs are highly inversely correlated. Any meaningful technical breaks should occur in both the EUR and Swissie to confirm USD direction. We like to refer to this as the ‘Dow Theory’ of the FX market.
