US Dollar: Recovery at Risk as Pivotal Week for Global FX Market Gets Underway

Despite the gradual recovery in the last three weeks, the US Dollar Index faced difficulty breaking the resistance level around 103.4. The current outlook suggests that this resistance remains a focal point.

The rise in 10-year bond yields from 3.8% to 4.18% since the beginning of the year contributes to the dollar's strength, although a weaker course is anticipated for the DXY this week. Major currencies, and also gold, continue to experience pressure.

The dollar's recovery momentum this month has been largely supported by data indicating the sustained strength of the US economy. The cautious stance of Fed members regarding an early interest rate cut can be considered another factor bolstering the dollar.

However, the Fed's indication of three interest rate cuts this year has led to increased speculation that the dollar's strengthening will be limited in the medium term. Nevertheless, the dollar maintains its recovery momentum amid the current uncertain environment.

EUR/USD

All eyes are on the European Central Bank's (ECB) policy meeting this week, with market participants aiming to anticipate the timing of potential rate cuts by the Fed. The market expectation suggests the ECB might implement five rate cuts this year, outpacing the Fed.

However, the ECB has indicated a slower and less aggressive approach to reducing borrowing costs compared to market expectations.

EUR/USD The euro's weakening trend against the dollar this month has signaled a potential trend reversal. The upward movement observed since October faced resistance at 1.106 (Fib 0.786) by the end of the year.

The pair, now returning to the upper band of the ascending channel, has broken below the 1.09 support level, indicating a downward shift in the ascending channel as of this week.

From a technical standpoint, this outlook could exert downward pressure on EUR/USD, provided the average stays below 1.0934. Consequently, the initial support in the lower range will be observed around the 1.084 level. If this support is breached, a correction towards 1.06 may become plausible.

In the event of a potential recovery, close attention will be given to the last resistance level of 1.106, especially with day closes above 1.0934. Further upward movements beyond this level could bring the upper band of the rising channel and the 1.12 range, corresponding to the peak in July 2023, into consideration.

USD/JPY

The Bank of Japan commenced its 2-day meeting today, with diminished expectations of an exit from negative interest rates, particularly following the earthquake on the first day of the year.

Although the yen was the major currency that depreciated the most against the dollar last year, the USD/JPY pair shifted its direction upward with renewed demand for the dollar after easing to 140 in the last months of the year.

In the ongoing upward movement since the beginning of the month, the Fib 0.618 value at 147.5 has now turned into support for USD/JPY after a swift passage.

While the pair has maintained a flat course for the last 3 days, the 149.4 level will be monitored as the closest resistance, with expectations for movement following decisions at the BOJ meeting.

Beyond this level, as long as the BOJ maintains its current policy, it may pave the way for new peaks and formations in the medium term, reaching levels around 154 - 158. However, a potential weakness in the dollar, depending on whether the Fed starts cutting interest rates in the second half of the year, could be a factor in slowing the upward trend.

GBP/USD

Sterling continues to display strength against the dollar, backed by the perception that the Bank of England will not implement interest rate cuts as swiftly as the ECB and the Fed, despite elevated inflation in the UK.

GBP/USD has maintained stability around 1.27, contrasting with the decline in the euro and Japanese yen against the dollar since the year's commencement. Consequently, the exchange rate has successfully sustained the recovery trend initiated in October.

In a technical aspect, it's noteworthy that GBP/USD has faced resistance at Fib 0.618 since December, stemming from the retracement in the July-October period last year.

While this region poses a challenge for the pair, a breakout with a weekly close subsequent to a potential pullback towards the 1.26 level might bolster a retracement to the 1.23 level.

On the upside, a weekly close surpassing the 1.27 range could fuel an uptick in sterling, potentially propelling the pair towards the resistance zone within the 1.288 - 1.308 range in the short term.

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Disclosure: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.