**Stocks Snap Back, USD Price Action Setups: EUR/USD, GBP/USD, USD/JPY**
*By Matt Weller, CFA, CMT, senior market analyst at Forex.com*
**Overview**
After weeks of complex directional plays and volatility, global stock markets staged a notable rebound as traders digested a complex mix of data flow, sentiment swings, and central bank speak. Meanwhile, the US dollar, which recently benefited from risk aversion and persistent rate-on rhetoric from Federal Reserve members, finds itself at a possible inflection point, with several major USD pairs trading at, or near, critical technical levels.
This analysis explores the recent recovery in risk assets, unpacks fresh USD price action setups for EUR/USD, GBP/USD, and USD/JPY, and examines broader market drivers that are shaping near-term outlooks.
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**Market Recap: Stock Recovery Points to Shifting Risk Dynamics**
Recent sessions saw equities bounce sharply after a pullback triggered by FOMC concerns, geopolitical uncertainty, and elevated inflation prints. Specifically:
– The S&P 500 rebounded impressively off short-term support near 5200, reclaiming the 5300 handle in the process.
– European indices mirrored this strength, with the DAX and FTSE pushing to multi-week highs as German investor sentiment improved and UK core inflation retreated.
– Growth-sensitive sectors regained leadership, with tech outperforming amid artificial intelligence hype and a softer-than-expected forward guidance from some chipmakers.
Investors attributed the rebound to a combination of:
– Oversold technical conditions after the April pullback
– An absence of escalation on fresh geopolitical fronts
– Federal Reserve speakers cautiously reaffirming data dependency rather than hawkish certainty
– A belief that the US economy is entering a so-called “Goldilocks” environment: still expanding, though with moderating inflation
Against this backdrop, risk-linked currencies bounced, while safe havens such as the US dollar, Japanese yen, and Swiss franc cooled off after strong rallies.
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**US Dollar: The Critical Crossroads**
The US dollar’s rally, spurred by persistent Fed hawkishness and risk-off sentiment, faced a minor reversal as risk appetite improved. However, the path forward depends on whether this equity rebound can sustain momentum and whether US economic data justifies higher interest rates for longer.
Key Dollar Drivers in Focus:
– **Interest rate expectations:** Recent hotter US CPI readings have pushed back expectations for Fed rate cuts, with markets now pricing in fewer than two quarter-point reductions in 2024. Dollar bulls continue to draw strength from the “higher for longer” thesis.
– **Data flow:** Any signs of labor market weakness, softening inflation, or declining retail sales could undermine the greenback’s premium.
– **Risk sentiment:** USD tends to perform as a “safe haven” during periods of financial stress but can weaken rapidly if volatility subsides and investors move back into risk assets.
The current environment leaves the dollar trading at a technically significant position, especially against the euro, British pound, and Japanese yen.
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**EUR/USD: Attempting a Base After a Steep Slide**
The euro fell sharply against the dollar over the past month, dropping from above 1.0900 to briefly test support just above 1.0600. This move was triggered by diverging economic fortunes, aggressive Fed retrenchment, and renewed rate cut speculation at the European Central Bank.
**Key Technical Levels:**
– **Support:** 1.0600-1.0640. This area has consistently attracted buyers on prior dips, serving as a platform for attempted recoveries.
– **Resistance:** 1.0750-1.0800. This marks a prior breakdown zone, aligning with the 21-day moving average and offering a technical barrier to upside moves.
**Catalysts and Outlook:**
– The ECB looks set to cut rates sooner than the Fed and possibly as early as June, which continues to pressure EUR/USD.
Read more on GBP/USD trading.