Dollar May Edge Lower Before Strengthening

The U.S. Dollar index (DXY) is down by 0.1% to 105.13 points this week, while the EURUSD has risen by 0.14% to 1.07870. The market is keenly awaiting the release of U.S. April inflation data on Wednesday.

The EURUSD experienced minor volatility, dipping to the support level of 1.07000-1.07400 before May 8, then rebounding following unexpectedly weak U.S. initial jobless claims last week. Overall, the pair closed the week with a slight gain of 0.1%.

The WisdomTree Bloomberg US Dollar Bullish Fund (USDU) continues to see strong net capital inflows, with investors adding $79.7 million to the fund last week, marking a record since April 2022. Historically, significant inflows into the USDU have been associated with dollar strength. For instance, after a record inflow of $264.4 million in April 2022, the EURUSD fell by 6.4% over six weeks. Given these developments, the dollar may strengthen by 2.0%, potentially pushing the EURUSD down to 1.05400.

Over the past four weeks, the USDU has reported net capital inflows of $148.9 million, levels last seen in April-May 2022. This suggests that investors may be accumulating long positions in the dollar, which could drive the EURUSD towards 1.05000. Despite this, the existing technical pattern indicates that the pair could edge above 1.09000 this week.

Consensus forecasts suggest that the April CPI will slow to 3.4% YoY compared to 3.5% in March, with Core CPI (excluding food and energy) expected to decline to 3.6% YoY from 3.8%. If these expectations are met, borrowing costs may decline, increasing the likelihood of a Federal Reserve interest rate cut in September to above 50.0% from the current 48.6%. Such outcomes would likely weaken the U.S. Dollar.

The nearest resistance for the EURUSD is at 1.08100-1.08400. If the pair surpasses this level, it could continue upward to 1.09000-1.10000, presenting an ideal entry area for opening short positions targeting 1.05000 by the second half of June.