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Bond yields in Germany, the UK, and the US continued to ascend in the first half of Thursday’s session, thus keeping US index futures under pressure. But the US dollar fell for a change, as major currency pairs staged an oversold bounce from key technical levels; the EUR/USD, for example, found support from around the 1.05 psychologically important level, which it had breached momentarily on Wednesday. The small decline in the US dollar will bring some relief but it is far too early to suggest the greenback has topped out. Its weakness today is merely driven by profit-taking. This should mean the EUR/USD will find it difficult to go meaningfully higher from current levels, without a significant change in the bearish macro backdrop.

The EUR/USD has been among the big losers in the FX space as the greenback extended its gains for 10 consecutive weeks. Judging by the dollar’s further gains this week, it looks like the Dollar Index will add one more weekly gain to make it 11 in a row, despite today’s losses.
 

Rising oil prices should keep the dollar supported

More concerning for investors and central banks right now is the rising prices of crude oil, which should make stagflation even worse for oil-importing countries in the Eurozone than oil-exporting nations like the US and Canada. This is also why investors have pushed out the timing of rate cuts well into the second half of 2024, and among the reasons why bond yields across the major developed economies continue to rise. For as long as we remain in a risk-off environment, one where global bond and stock markets are selling off, this is usually bad news for currency pairs like the EUR/USD.
 

The focus turns to US data

From the US, we have just had a few not-so-significant data releases earlier, coming ahead of more important ones such as the Core PCE Price Index on Friday (see below for more). The weekly jobless claims data came in better than expected, showing a print of 204k vs. 214K expected and 201K in the week prior. The final GDP estimate was expected to show a positive revision to 2.2% from 2.1% previously recorded – but didn’t, and this caused USD to spike lower momentarily. Later in the day, pending home sales are seen falling 1.1% month over month after a rise of 0.9% the month before.

Wednesday’s only piece of US data – durable goods orders – came in higher than expected.  So, there was no reason for the dollar rally to end, which is why the EUR/USD went on to fall to 1.05 handle. Today’s mixed US data should keep the downside limited for the dollar, keeping the pressure on major FX pairs like the EUR/USD.
 

Can the dollar maintain bullish momentum?

If we see more evidence of a stronger-than-expected US economy in the upcoming data releases on Friday and next week, then this should keep the dollar bulls satisfied to keep bidding the greenback higher. See the economic calendar for more.

Despite its weaker performance in the first half of Thursday’s session, the US dollar has obviously been on a strong rally. It has been boosted by relatively stronger data in the US compared to other developed economic regions, such as the UK and Eurozone. Persistent signs of inflation, coupled with recent gains in crude oil prices, influenced by OPEC extending its output cuts, have provided further impetus for Federal Reserve policymakers to maintain a more hawkish stance on interest rates. Consequently, the anticipation of the first interest rate cut has been pushed well into the latter half of 2024, with the Federal Open Market Committee (FOMC) now forecasting only two rate reductions, down from the previously projected four for the upcoming year. This shift in sentiment has led to the 10-year Treasury yield surpassing 4.50% for the first time since 2007.

The distinctly more hawkish stance of the US central bank, in contrast to its counterparts abroad, has been a driving force behind the robust performance of US bond yields and the US dollar. This resolute bullish trend in the dollar means the EUR/USD could fall further in the weeks ahead.
 

Focus turns to Friday’s core PCE index and next week’s key data

The US core PCE Price Index, which is rumored to be the Fed’s favorite inflation gauge, is expected to be released on Friday at 13:30 BST.

Last week’s hawkish pause from the Fed triggered a sharp sell-off in stocks and bonds while lifting yields and the dollar higher. The Fed is worried about inflation and oil prices remaining high. Investors are worried the Fed’s tightening cycle may not be over just yet, after the central bank’s strong inclination towards rate cuts being pushed further out in 2024, with the possibility of one more hike before the end of this year.

So, if the Fed’s favorite inflation measure also mirrors the CPI from a couple of weeks ago and comes in higher, then this should further support the dollar. A noticeable miss is what the dollar bears, or EUR/USD bulls, would be desperate to see.

Next week, we will have more US data to look forward to including the ISM services PMI on Wednesday and the September jobs reports on Friday.
 

EUR/USD technical analysis

The EUR/USD has now fallen to our main short-term target of 1.05, which I had been calling for weeks. With so many people eyeing this level, naturally a bounce was to be expected – above all, due to profit-taking. While a rebound here makes perfect technical sense, it does not necessarily mean the EUR/USD will bottom out here. So, watch out for renewed weakness to come into play once the counter-trend move fades. Key short-term resistance is seen around 1.0562, Tuesday’s low. On the downside, the next bearish target below 1.05 is the liquidity resting below January’s low at 1.0482.

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Source: TradingView.com

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