**US Dollar Rebound Appears Corrective: EUR/USD and GBP/USD Set to Bounce**
*By Fawad Razaqzada, contributing analyst*
The US dollar has staged a notable rebound across major currency pairs recently, partly reversing losses from earlier in June 2024. While the dollar’s strength surprised some market participants, current technical and macroeconomic signals suggest that this uptick is largely corrective rather than indicative of a renewed upward trend. Against this backdrop, pairs like EUR/USD and GBP/USD are building the foundation for potential recoveries, as risk appetite and interest rate differentials remain the dominant drivers of foreign exchange markets.
**US Dollar’s Rebound: Corrective or Trend Change?**
The dollar index (DXY) has bounced off its early-June lows, gaining ground over the past several sessions. Market-watchers are keenly dissecting whether this move is the start of a sustained dollar uptrend or simply a near-term corrective rally. The consensus among many analysts, including myself, is that it is the latter. Several interlinked factors drive this view:
– **Risk Appetite:** The S&P 500 and Nasdaq have continued to make record highs, signaling broad market risk appetite that typically weighs on the dollar. The dollar’s safe-haven appeal is only marginally at play.
– **US Interest Rates:** While the Federal Reserve remains cautious on rate cuts, expectations have shifted to only one rate cut in 2024, from a previously anticipated two cuts. Though this hawkish tilt supported the dollar in the near-term, the longer-term trajectory still points toward eventual easing — a dollar-negative factor.
– **Economic Data Divergence:** Recent US economic data, while mixed, still signals moderate growth and persistent inflation, but not to an extent that would dramatically separate the US outlook from other G7 economies.
**What Drove the US Dollar Higher in June?**
Several developments contributed to the dollar’s recent strength:
– **Fed Communications:** The Federal Reserve’s latest policy statement and updated projections pointed to fewer interest rate cuts over the coming year, suggesting sticky inflation could keep policy restrictive longer than hoped.
– **Economic Surprises:** Some US data, such as Nonfarm Payrolls and retail sales, beat expectations, reinforcing Fed caution.
– **EUR/USD and GBP/USD Weakness:** European and UK economic data, by contrast, looked more fragile, pushing the euro and pound lower against the greenback.
– **Geopolitical Backdrop:** Ongoing political uncertainty in the euro area, particularly around upcoming French parliamentary elections, weighed on the euro.
**EUR/USD Technical and Fundamental Backdrop**
EUR/USD dropped from June’s highs near 1.0900, upending a multi-week upside move and falling toward the mid-1.06s. There are both technical and fundamental reasons to expect the euro could stabilize in the days ahead, even if the dollar continues to find short-term support:
– **Technical Outlook:** The decline has brought EUR/USD toward its 100-day moving average. Each time this area was approached in recent months, buyers have emerged, suggesting solid support.
– **Sentiment Positioning:** CFTC data shows that speculative long positions in the euro remain modest, meaning there is room for bulls to return as selling becomes exhausted.
– **European Central Bank (ECB) Policy:** While the ECB cut rates in early June, the language suggested that further easing will be data-dependent and more gradual, limiting downside pressure on the euro.
– **Political Risk Premium:** Much of the euro’s recent weakness stems from political jitters in France and uncertainty heading into the French National Assembly election. Should worst-case political scenarios be avoided, investor confidence in the eurozone could rebound.
**Potential Catalysts for a EUR/USD Rebound**
If the above headwinds abate, EUR/USD could quickly find itself back in rally mode. Watch for:
– **Stabilization in French Bonds and Stocks:** Signs of calm in French financial markets would demonstrate that
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