Dollar Might Be Preparing Unexpected Revenge

The U.S. Dollar Index advanced by 0.47% to 98.23 points over the week, with the euro weakening by 0.38% to 1.16470 against the dollar. The EURUSD started the week with a sharp, catalyst-free decline of nearly 1.0% to 1.16040, followed by a brief consolidation on Tuesday. By Wednesday, the move intensified, sending the pair down a further 0.26% to 1.15730 and erasing the entirety of the post-Jackson Hole rally sparked by Federal Reserve Chair Jerome Powell’s dovish comments. Yet, by the end of the week, the euro managed to recover above 1.17000, despite strong U.S. Q2 GDP data and steady August PCE inflation readings, both of which typically favour the dollar.

The following Monday, EURUSD again climbed above 1.17000, raising hopes of a sustained breakout that could have set the stage for a rally toward 1.19500–1.20500. However, two elements were missing: a clean retest of the 1.17000 level and participation from U.S. traders, who were absent due to a holiday. Once American investors returned, the breakout failed, and the pair slipped back below 1.17000. The move coincided with weakness across other currencies, with sterling hit hardest, losing 1.2% to 1.33750.

Notably, these shifts unfolded without major news triggers. The Eurozone reported only a mild uptick in August inflation to 2.1% year-on-year from 2.0%, while the UK’s main development was a rise in 30-year gilt yields to 5.70%, the highest since 1998. This lack of significant drivers suggests the euro-dollar is undergoing a period of consolidation within the 1.16000–1.17000 range, which has persisted for nearly three weeks. A similar consolidation occurred in March, following a 5.0% rally on German Chancellor Friedrich Merz’s announcement of increased defence spending, when the euro gained 7.0% to 1.15750. This time, prices peaked higher at 1.18290, their strongest since September 2021.

Extended consolidations often precede breakouts, but the risk of a false move remains high. A final push above 1.18290 could trigger stop-loss orders before reversing, making a decisive dollar recovery unlikely without such a spike. If Tuesday’s decline reflects positioning for such a scenario, potential catalysts include the court ruling on the dismissal of FOMC member Lisa Cook, a case tied to the Federal Reserve’s independence and highlighted by ECB President Christine Lagarde, or the August U.S. labour market report, which could pressure the Dollar if it surprises to the downside.

Meanwhile, large investors continue to reduce their bullish dollar exposure, cutting another $5.3 million from positions in the WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU), bringing their remaining stake to $16.7 million from $30.3 million previously.

The most reliable signal remains a confirmed breakout from the 1.16000–1.17000 band. Traders may look for a retest of the breached level for confirmation. A convincing break above 1.17000 would open the way toward 1.19500–1.20500, though the risk of a bullish trap remains elevated.