As seen in the chart below, just three weeks ago, the EURUSD hit its highest levels in over three years, trading north of 1.1500. The daily MACD indicated how overbought the single currency was when compared to the US dollar.
Source: TN Trader
This came as the dollar was under extreme downside pressure as investors viewed the Trump administration’s reciprocal tariffs as a harbinger of higher inflation. If so, this would prevent the Federal Reserve from cutting interest rates further, and as Fed Chair Jerome Powell cited tariff-based uncertainties as a reason for caution.
Since then, there have been a succession of tariff rollbacks which led to a sharp bounce in the dollar, taking the EURUSD back down to test 1.1200 as support (previously resistance). This weekend’s announcement of unexpected progress in US-China trade talks, which led to both sides slashing their respective tariffs by 115% for 90 days, placed a rocket under the dollar, while the euro slumped. The move saw 1.1200 break as support.
The euro’s sell-off over the last three weeks has also seen the MACD fall back towards neutral levels. This set the stage for a sharp bounce in the euro yesterday, and that has continued into today’s trade. This bounce was helped by yesterday’s benign US inflation update which saw an unexpected drop in the CPI.
The data suggests that the Fed may have more room than previously thought to cut rates this year. Maybe. Chart-wise, the euro was overbought back in April. Now it isn’t. Traders have come in to buy euros at cheaper prices, sending the single currency higher.
Is this bounce a signal that the dollar has further to fall, or is it just a short-term correction after the euro’s three-week sell-off? Much will depend on how the currency pair deals with support/resistance around 1.1200, where it currently trades. So far, it’s looking better for the euro. But the markets are currently pricing in just two, or maybe three, 25 basis point rate cuts from the Fed by year-end, down from four just a month or so ago.
If US unemployment continues to hold up, and should inflation start to flatline or turn higher, then US rate cuts could get priced out further. If so, that would be a green light for dollar bulls.
