Most Read: USD/JPY Trade Setup: Awaiting Support Breakdown to Validate Bearish Outlook
The U.S. dollar, as measured by the DXY index, dropped nearly 0.8% this past week. This weakness was primarily driven by a pullback in U.S. Treasury yields, triggered by weaker-than-projected U.S. consumer price index data. For context, headline CPI rose 0.3% on a seasonally adjusted basis in April, falling short of the 0.4% forecast and bringing the annual rate down to 3.4% from 3.5% previously.
The subdued CPI print sparked renewed optimism that the disinflationary trend, which began in late 2023 but stalled earlier this year, had resumed. This led traders to believe that a Federal Reserve could start dialing back on policy restraint in the fall, resulting in downward pressure on the greenback, with sellers taking advantage of the situation to ramp up bearish wagers.
Later in the week, cautious remarks from several Fed officials about the potential timing of rate cuts sparked a modest rebound in the U.S. dollar. However, this uptick was insufficient to offset the bulk of the currency's earlier losses.
Looking ahead, the prospect of Fed easing in the second half of the year, combined with increasing signs of economic fragility, suggests that U.S. bond yields will have a hard time extending higher. This removes an important tailwind that previously supported the dollar's strength in Q1, indicating potential for further downside in the short term.
The upcoming week features a relatively light U.S. economic calendar, allowing recent foreign exchange movements to consolidate. However, the near-term outlook will require reassessment later this month, with the release of the next batch of core PCE figures. As the Fed's preferred inflation gauge, the PCE deflator will offer crucial insights into the prevailing inflation landscape, crucial for guiding the central bank's policy trajectory and the broader market direction.
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EUR/USD FORECAST - TECHNICAL ANALYSIS
EUR/USD remained subdued late in the week, unable to sustain its upward momentum after Wednesday’s bullish breakout, with the exchange rate seesawing but holding steady above 1.0865. Bulls need to keep prices above this area to prevent a resurgence of sellers; failure to do so could result in a pullback toward 1.0810/1.0800.
On the other hand, if buying momentum resurfaces and the pair moves higher again, overhead resistance can be spotted near 1.0980, a key technical barrier defined by the March swing high. Should the pair continue to strengthen beyond this point, buyers might gain confidence and target 1.1020, a dynamic trend line extending from the 2023 peak.
EUR/USD PRICE ACTION CHART
EUR/USD Chart Created Using TradingView
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| Change in | Longs | Shorts | OI |
| Daily | -11% | 6% | -1% |
| Weekly | -35% | 43% | 2% |
GBP/USD FORECAST - TECHNICAL ANALYSIS
GBP/USD accelerated to the upside this past week, briefly reaching its highest level in nearly two months at one point before the weekend. If the rally continues and gains momentum in the coming sessions, resistance is likely to appear at 1.2720, the 61.8% Fibonacci retracement of the 2023 decline. Further strength could then direct focus toward the 1.2800 mark.
On the flip side, if the upward impetus fades and sellers regain control of the market, confluence support extending from 1.2615 to 1.2585 could offer stability in case of a pullback. If tested, traders should watch closely for price reaction, keeping in mind that a breakdown could give way to a move towards the 200-day simple moving average hovering around 1.2540.
GBP/USD PRICE ACTION CHART
