EURUSD Should Be Reversing Soon

The U.S. Dollar Index (DXY) has declined by 0.82% to 96.60 points, while the EURUSD has climbed by 0.81% to 1.18110. The Dollar came under sustained pressure throughout the week as a wave of negative developments hit the market. By Tuesday, the Middle East conflict had been largely dismissed after Iran and Israel agreed to a ceasefire. The EURUSD initially jumped to 1.15770. Not long after, Federal Reserve Chair Jerome Powell contributed to the Dollar’s troubles during his testimony to Congress. When asked about a possible rate cut in July, Powell remarked that “many paths are possible” — a notably dovish shift in tone. The pair surged to 1.16410, breaching a major resistance level that had previously capped further upside, opening the way toward the 1.18000–1.19000 zone. This shift was further solidified by Fed Governor Michelle Bowman, known for her typically hawkish stance, who suggested that if inflation remains at current levels, a rate cut in July would be appropriate. This surprising shift in tone from Bowman sent further distress signals through the U.S. currency. Then came a sharp downgrade in the revised Q1 U.S. GDP figures, showing a contraction of 0.5% QoQ, far worse than the previously estimated -0.2%. That was enough to push the EURUSD decisively above 1.16400 and towards the extreme upside target.

Pressure on the Dollar intensified after U.S. President Donald Trump escalated his criticism of Powell and openly discussed choosing the next Fed Chair, possibly as soon as early autumn. The assumption is that the incoming Republican candidate would favour lower rates, diminishing Powell’s remaining influence. These developments helped push the EURUSD up to 1.17530 by Friday.

However, the rally stalled slightly after May’s Personal Consumption Expenditures (PCE) price index showed stronger-than-expected inflation. Headline PCE rose by 2.7% YoY versus 2.5% in April. That surprise led to a modest pullback in the EURUSD to 1.17150, but the pair remained bullish with the target zone of 1.18000–1.19000 still intact.

Over the weekend, trade headlines added more complexity. The U.S. and Canada resumed negotiations after Trump applied pressure over Canada’s digital tax. Meanwhile, talks with the EU and Japan showed no progress. These trade frictions may have contributed to another push in the EURUSD towards the extreme upside zone on Monday and Tuesday.

Markets are also watching developments around a new U.S. tax reform initiative. Trump aims to pass a bill through Congress by week’s end that would extend and expand tax cuts, adding trillions to national debt. Some traders argue that increased debt could weaken the Dollar, while others believe higher borrowing demand might lift yields, potentially supporting the currency.

June PMI data is due Tuesday, offering a possible bright spot for the Dollar. However, Powell is also expected to speak at the ECB forum in Portugal that same day. Given his recent dovish tone and Trump’s ongoing pressure on Powell his comments could once again shift sentiment quickly. Labour market data will follow with ADP’s preliminary Nonfarm Payrolls report on Wednesday and the official numbers on Thursday. Forecasts are not encouraging, with expectations that unemployment could rise from 4.2% to 4.3%. Such data could provide Powell with the cover needed for more accommodative policy.

Despite all this, the EURUSD has already reached the extreme target zone of 1.18000–1.19000. Further gains from here may be limited. A brief spike to the top of the range is possible, but technically the rally looks overextended. A deep correction towards 1.15000 or even a reversal could follow. Large investors seem to agree. The USD Bullish Fund (USDU) reported neutral capital flows last week, but considering the heavy outflows that began when the EURUSD was at 1.09500, their broader positioning remains strongly bearish on the Dollar.