Market Update: After a sharp retreat, the U.S. dollar is showing signs of stabilizing, especially against the Swiss franc and Japanese yen. As Treasury markets calm down and technical indicators point to oversold conditions, the stage might be set for a short-term reversal in USD/CHF and USD/JPY pairs.
Dollar Faces Identity Crisis Amid Treasury Turbulence In recent weeks, rising U.S. Treasury yields have failed to support the dollar the way they typically do. Instead of drawing global capital into dollar assets, surging yields have spooked investors, pushing them toward perceived safer currencies like the Swiss franc and Japanese yen. As a result, USD/CHF and USD/JPY both broke below major support zones last week.
But after Monday’s market action, there’s growing potential for the dollar to bounce back. U.S. bond markets showed signs of life, and momentum indicators are flashing signals that USD-related selling may have gone too far, too fast.
Have Yields Found a Bottom? The volatility in U.S. 10-year Treasury note futures over the past two weeks has been intense. Yields plunged, only to surge by 50 basis points in a single week the biggest such move since 2001. For context, when bond prices fall, yields rise, so this swing signals extreme uncertainty among investors.
However, Monday brought a shift. Yields fell sharply as bond prices rebounded, bringing a welcome breather to the chaos. Technical indicators like the 14-day Relative Strength Index (RSI) broke out of their downward trajectory, suggesting a neutral trend may be forming. Meanwhile, the MACD is still in negative territory but isn’t showing aggressive bearish momentum anymore.
This change in sentiment could give the dollar some breathing room, especially as the typical correlation between yields and the greenback appears to be acting in reverse. Rather than hurting the dollar, falling yields might support it in the near term.
USD/CHF: Is a Reversal Brewing? The USD/CHF pair plunged last week, slicing through its December 2023 low and signaling aggressive bearish sentiment. Technical momentum remains negative, with both RSI and MACD pointing lower. But something changed on Monday the pair didn’t continue its drop despite broad USD weakness.
Instead, USD/CHF formed a “tombstone doji,” a candlestick pattern often linked with potential reversals. If Tuesday’s session confirms a bullish move, we could see the formation of a classic morning star a pattern that typically marks a trend bottom.
With RSI deep in oversold territory, traders may start looking for a countertrend rally. A potential entry point could be near current levels, with a stop just below 0.8100 for protection. Resistance may emerge around 0.8260, which capped gains over the past two sessions. If momentum carries the pair higher, the next key level to watch is the December low at 0.8333. However, a break below 0.8100 would invalidate this rebound scenario.
USD/JPY: Bulls Holding the Line at 142.00 Similar to USD/CHF, the USD/JPY pair has suffered a steep decline but managed to hold key support near the 142.00 level. Although not as deeply oversold as its Swiss counterpart, the yen’s recent strength may be overextended, especially with dollar sentiment starting to stabilize.
So far, USD/JPY has failed to break below 142.00 on multiple occasions, opening the door for a potential bounce. A long position might make sense slightly above that support, with a protective stop just below. For targets, 144.00 could serve as a short-term objective, with 148.15 acting as a broader resistance zone if bullish momentum picks up.
Momentum indicators, though still bearish, could shift quickly if Treasury yields continue to retreat and market nerves calm. That would give USD/JPY bulls an opening to retest higher levels.
Final Thoughts: After weeks of weakness, the U.S. dollar may finally be finding some footing at least temporarily. Treasury markets appear to be stabilizing, and both USD/CHF and USD/JPY are showing signs of exhaustion on the downside. While risks remain, especially with ongoing headline-driven market reactions, conditions are ripe for a potential dollar rebound.
Stay tuned, as the next few sessions could determine whether this is just a pause or the beginning of a broader recovery.
