The US dollar index rebounded on Wednesday, snapping a three-day losing streak and signaling a potential continuation of its bullish trend. This recovery places EUR/USD at risk of falling below 1.05, while USD/JPY flirts with a breakout.
USD Index Resumes Bullish Trajectory
The USD index reversed its recent retracement, recovering earlier losses and inching closer to a potential breakout above 107. A three-bar bullish reversal pattern, combined with strong support levels, suggests a continuation of the rally. However, bearish divergence on the daily RSI hints at possible choppy trading or a false breakout before further gains.
- Key Levels to Watch:
- Bullish targets: 107.5 (weekly R1), 108 (mid-July highs).
- Support: 105.35 (election high), 105.63 (April high).
Despite this momentum, traders remain cautious as Fed fund futures reflect diminishing odds of rate cuts in December, dropping from 82% to 52% in just a week.
EUR/USD: Bearish Risks Amid Global Uncertainty
The euro faces growing pressure amid geopolitical challenges and economic uncertainty. With Europe grappling with the Russia-Ukraine conflict and potential US tariffs, EUR/USD could break below the 1.05 level, drawing attention to the 2023 low of 1.0450.
The euro’s weight in the USD index (~57%) makes its movement critical to the index’s trajectory. Flash PMI data and ECB commentary later this week could further influence the pair.
USD/JPY: Resistance Looms as MOF Jawbones the Yen
USD/JPY remains near resistance at 156.79 but faces potential limitations. Japan’s Ministry of Finance recently intervened verbally, pushing USD/JPY nearly 300 pips lower last week. This intervention may deter traders from chasing a breakout, capping gains below the week’s high.
While the yen’s lower weight in the USD index (~14%) reduces its influence, risk-off sentiment or further jawboning could trigger deeper pullbacks.
- Key Levels to Watch:
- Resistance: 156.79 (recent high).
- Support: Potential pullback levels driven by risk aversion.
Inflation Concerns Add to Market Volatility
Inflation remains a key theme globally, with hotter-than-expected data in Canada and the UK signaling potential challenges ahead. These trends suggest central banks, including the BOE, may adopt a slower pace of rate cuts, contributing to heightened market sensitivity.
The appointment of Howard Lutnick as the next US Commerce Secretary further highlights potential trade tensions. Lutnick’s likely focus on tariffs and dealings with China’s tech sector could intensify trade disputes, adding another layer of complexity to market dynamics.
Events to Watch (AEDT):
- US Data: Jobless claims and Philly Fed manufacturing could extend the USD rally if results exceed expectations.
- ECB and BOE Speeches: Comments from key policymakers may influence EUR/USD.
- Global Sentiment: Inflation updates and geopolitical developments remain critical.
Outlook
The USD index appears poised for further gains if technical resistance levels are breached. However, caution is warranted as bearish divergences and external risks could lead to temporary setbacks. Both EUR/USD and USD/JPY are at critical junctures, with their next moves likely influenced by upcoming data and policy developments.
