The Dollar is Close to a Pivotal Moment

The U.S. Dollar index (DXY) has shown strength this week, rising by 0.3% to 106.30. Conversely, the EURUSD has experienced a decline of 0.2% to 1.06150, reaching its lowest level since November 2, 2023, when it was lower at 1.0620 early Tuesday.

The currency market has been relatively stagnant for almost four months, with the EURUSD mostly trading within the 1.08000-1.09000 range. However, the trend has finally shifted in favor of the Greenback following higher-than-expected March inflation data in the United States. Consumer prices for March increased to 3.5% YoY, surpassing consensus at 3.4% and up from 3.2% in February. This exceeded Federal Reserve (Fed) projections and led to a rise in U.S. 10-year Treasuries yields to 4.58%, while bets on interest rate cuts by the Fed in June dropped below 20.0% from 56.0%.

The Euro faced downward pressure as the European Central Bank is expected to cut interest rates in June. The EURUSD dropped to 1.06400 on April 10 from 1.08600. Although there was a recovery on April 15, strong retail sales in the U.S. at 0.7% MoM for March pushed the 10-year Treasuries yields further up to 4.66%, leading the Dollar to set a new 5-month high.

The strengthening of the Greenback has become more pronounced, with reports of significant bets on options supporting this trend. However, for the Dollar to continue strengthening, some correction may be necessary. From a technical standpoint, a correction to the area around 1.06700-1.06800 for the EURUSD seems plausible. This pivotal moment may prompt consideration of opening short trades for the Euro. However, such a downside scenario is controversial, given strong support located at 1.05000-1.06000. Alternatively, a drop in GBPUSD to 1.20000-1.21000 appears more realistic if the pair falls below the support at 1.24000.

The trigger for the EURUSD correction is uncertain, but China's weakening of the Yuan after mixed economic data on Tuesday has added pressure to the currency market. March inflation data releases in the Eurozone and the U.K. on Wednesday could potentially initiate the correction if they exceed expectations.