Is the US Dollar Finally Losing Momentum?

• US dollar index faces risk of ending its 11-week bullish streak, with potential to fall to 105.5
• Factors contributing to dollar's strength include hawkish Fed, Eurozone recession concerns, and weak data from Asia
• Meanwhile, EUR/USD has staged a small recovery but remains within a downtrend

The US dollar index, after reaching a peak of 106.84 during its 11-week bullish streak, now faces the risk of ending this streak by potentially falling as low as 105.5.

Several factors have contributed to the US dollar's strength on a global scale, including a hawkish view of the US dollar supported by robust economic data from the Federal Reserve. Meanwhile, recession concerns in the Eurozone and weak data from Asia have added to the dollar's rise.

This continuous increase in the dollar index, the longest in the last nine years, is largely underpinned by the expectation that the Federal Reserve will maintain high interest rates through 2024. Additionally, the US economy exhibits more resilience compared to other economies, benefiting from positive trends in employment, inflation, and energy prices.

Recently, there has been a rapid pullback of up to 1% from the dollar's peak, providing some relief to other major currencies.

This correction appears to be linked to concerns about a potential partial shutdown of the US government starting on October 1, as the Senate has yet to reach a budget agreement. Consequently, US 2-year and 10-year bond yields have also eased.

US 2- and 10-Year Bonds Chart

US Dollar Index: Technical View

While the US dollar index may have paused in the 106 region, it still maintains an upward trend. A weekly close above an average of 105.25 suggests a high likelihood of the dollar resuming its upward trajectory.

DXY Price Chart

Furthermore, if the recent retreat of the dollar is indeed driven by concerns about a government shutdown and this risk is mitigated through an agreement, it may increase demand for the dollar again.

In such a scenario, the DXY could potentially target the critical resistance level of 108, surpassing its previous peak in the 106 region. Conversely, daily closes below 105 could dampen the bullish momentum, leading the index to potentially retreat to the 103 area.

In summary, the DXY has been testing the 106-108 level this week, and the resistance in this range remains a focal point. Next week's approaches to dollar demand in the 105 region could be decisive for determining the trend's direction.

EUR/USD: Technical View

Meanwhile, the EUR/USD pair touched as low as 1.0488 this week but has shown some recovery recently. Factors such as recession concerns in the Eurozone and below-expectation inflation data from Germany have impacted the euro's performance.

EUR/USD Daily Chart

However, the euro has made a recovery, returning to the 1.06 range. If EUR/USD stays above 1.06, the recovery trend is expected to continue, with a significant milestone being the achievement of the 1.068 level.

On the other hand, if the pair cannot maintain the 1.06 level, the downward trend may persist, potentially leading to levels around 1.02 and 1.04 in the short term.

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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. As a reminder, any type of assets, is evaluated from multiple points of view and is highly risky and therefore, any investment decision and the associated risk remains with the investor. The author does not own the stocks mentioned in the analysis.