**US Dollar Rebound Appears Corrective; EUR/USD and GBP/USD Set to Bounce**
*Adapted and expanded from an article by Fawad Razaqzada for FOREX.com.*
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After a robust rally, the US dollar is showing signs of exhaustion and vulnerability to a corrective pullback, especially against the euro (EUR/USD) and British pound (GBP/USD). Recent price action and underlying market dynamics indicate that the ongoing US dollar strength may be temporary, offering potential opportunities for euro and sterling bulls who anticipate a reversal or at least a relief rally in the days ahead.
This article will explore the driving factors behind the US dollar’s latest surge, technical and fundamental catalysts for a potential correction, and specific outlooks for both EUR/USD and GBP/USD.
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### US Dollar’s Recent Rally: Key Driving Forces
Throughout the early part of 2024, the US dollar has benefited from a blend of robust economic data, higher-for-longer Federal Reserve monetary policy expectations, and external factors affecting major currency peers. Key pillars of the dollar’s strength include:
– **Sticky Inflation in the US:** The latest Consumer Price Index (CPI) and Producer Price Index (PPI) releases have pointed to persistent price pressures in the US. This prompted the Federal Reserve to maintain a hawkish tone, reducing expectations of imminent rate cuts.
– **Resilient Labor Market:** Solid Non-Farm Payrolls (NFP) over recent months have reinforced the view that the US economy remains strong relative to global peers.
– **Yield Differential:** US 10-year Treasury yields have stayed elevated compared to European and UK equivalents, attracting foreign capital flows into dollar-denominated assets.
– **Safe-Haven Demand:** Global risk aversion, stemming from geopolitical tensions and bouts of equity market volatility, has also underpinned the greenback as investors flocked to safe-haven assets.
These fundamental supports have propelled the US Dollar Index (DXY) to multi-month highs and driven EUR/USD and GBP/USD toward their lowest levels since 2023.
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### Signs of Exhaustion: Is the Dollar Ripe for a Correction?
Despite the powerful run, there are growing indications that the US dollar’s momentum is stalling and a corrective move is on the horizon. Signs include:
– **Technical Overextension:** Many key dollar pairs, including USD/JPY, EUR/USD, and GBP/USD, are exhibiting signs of overbought/oversold conditions on the daily and 4-hour timeframes.
– **Bearish Divergence:** The Relative Strength Index (RSI) has begun to diverge from price on some major dollar crosses, suggesting waning bullish momentum.
– **Market Positioning:** The latest Commitment of Traders (COT) reports show elevated long dollar positions among speculators, a sign that the trade may be crowded.
– **Fed Rate Cut Expectations Re-Calibrated:** While traders had priced out aggressive Fed rate cuts, the risk is now skewed towards the eventual realization that central bank easing will occur, potentially undermining the dollar when it arrives.
– **Seasonal Trends:** Historically, the dollar tends to face corrective pressure as the second quarter progresses, with investors recalibrating holdings post-earnings season and before summer.
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### EUR/USD Technical and Fundamental Outlook
The euro-zone economy has faced headwinds, with growth stagnant and inflation slowly easing, giving the European Central Bank (ECB) room to consider rate cuts later in 2024. Yet despite this relative dovishness, the EUR/USD pair is overdue for a bounce, with powerful technical support nearby.
#### Technical Picture for EUR/USD
– **Support Zone:** EUR/USD is probing the psychological 1.0600 level, an area that has acted as strong support in the past (notably in late 2023).
– **Oversold Conditions:** The daily RSI has reached levels seen at prior turning points, indicating that sellers may be losing momentum and profit-taking could spark a rally.
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Read more on GBP/USD trading.