Title: US Dollar Hits Four-Month Highs Before Pullback: Key Moves in EUR/USD, GBP/USD, USD/JPY, and USD/CAD
Originally reported by Matt Weller, CFA, CMT for FOREX.com
The US dollar surged to four-month highs recently, driven by bullish economic data and rising bond yields, before seeing a modest pullback. Favorable macroeconomic indicators and hawkish sentiment surrounding the Federal Reserve’s interest rate policy have fueled the rally. Meanwhile, major currency pairs like EUR/USD, GBP/USD, USD/JPY, and USD/CAD are experiencing notable shifts as a result of the greenback’s strength.
This article delves deeper into the USD rally, analyzing the technical and fundamental shifts driving the USD’s movement, along with the implications for global markets and key currency pairs.
Key Drivers Behind the USD’s Recent Strength
Several forces have combined to push the US Dollar Index (DXY) to its highest level in four months earlier this week:
– Strong US economic data: Resilient activity in the services and labor sectors, including a robust March Non-Farm Payroll (NFP) report, has bolstered confidence in the US economy.
– Hawkish Fed expectations: Despite softening inflation in previous months, the Federal Reserve maintains a relatively hawkish stance. Rate cuts expected earlier in the year have been repriced, pushing expectations out to 2024 or later.
– Rising US Treasury yields: With the 10-year benchmark nearing 4.6%, investors are seeking higher returns in USD-denominated assets.
– Safe-haven demand: Increasing geopolitical risks, particularly instability in the Middle East and the ongoing Ukraine conflict, have driven risk-off sentiment, benefiting the dollar.
US Dollar Breakout and Current Technical Outlook
As noted by Matt Weller in his coverage at FOREX.com, the US Dollar Index broke above the critical resistance zone of 104.25 to reach levels near 105.10. This move has taken the DXY beyond its January and March 2024 peaks. However, it’s now facing a pullback due to short-term overbought technical conditions and renewed buying pressure in some of the dollar’s key counterparts.
From a technical perspective, the DXY has:
– Challenged its highest levels since November 2023
– Overcome short-term resistance at 104.25 and 105.00
– Reached near-term RSI levels suggesting overbought status, prompting some investor caution
While the pullback may dampen short-term bullish momentum, fundamentally, the supportive environment for the USD appears intact as long as inflation and growth data do not significantly weaken in upcoming months.
EUR/USD: Euro Capped by ECB and Political Headwinds
The euro has suffered in the wake of dollar strength, with EUR/USD falling toward 1.0700 before seeing a slight correction. The pair had been consolidating in a descending triangle formation before the bearish breakout earlier this week.
Key pressures on the euro include:
– Dovish European Central Bank (ECB): The ECB is widely expected to start cutting rates as soon as June, creating divergence from the Federal Reserve.
– Inflation moderation: Eurozone inflation slowed to 2.4% in March, near the ECB’s 2% goal, reinforcing the case for easing.
– Weak fundamentals: German factory orders and industrial production continue to disappoint, reflecting broader slowdown risks across the eurozone.
– Political uncertainty: Upcoming European Parliament elections in June could see a rise in populist vote shares, adding another layer of uncertainty.
Technical analysis suggests:
– Support at 1.0650 and 1.0600 may come into play if selling resumes.
– Resistance now sits around 1.0750 to 1.0780 if the euro continues its recovery.
– Momentum indicators point to consolidation or a corrective bounce in the short term.
Analysts at ING note that EUR/USD may hover around the 1.0700 level until clearer central bank guidance emerges
Read more on USD/CAD trading.