Dollar Is Shy to Weaken

The U.S. Dollar Index (DXY) is down 0.85% to 106.26 points this week with the EURUSD rising by 1.63% to 1.05400. The Dollar’s sharp decline from Monday is unusual and may be driven by slowing inflation. The January PCE Index fell to 2.5% YoY from 2.6%, while core PCE (excluding food and fuel) dropped to 2.6% YoY from 2.8%. This weakness was compounded by disappointing ISM March Manufacturing PMI, which declined to 50.3 points, although S&P Global Manufacturing PMI increased to 52.7 points.

Additionally, Atlanta Fed Q1 2025 GDP projections suggest the U.S. economy may contract by 2.8% QoQ, pushing 10-year Treasury yields down to 4.16% from 4.44% last week. Growing bets on Fed rate cuts have further weakened the Dollar, which was not supported by President Donald Trump’s tariff hikes on Mexico, Canada, and China. The S&P 500 immediately fell 1.4% on the news, and while the Dollar previously reacted positively to tariffs in January and February, this time it followed stocks lower. Notably, EURUSD opened the week with a gap at 1.03710, which has yet to be closed.

Despite this Dollar weakness, large investors continue to support the currency, adding $2.74 million to their positions last week, following $61.69 million in inflows the prior week through the WisdomTree Bloomberg US Dollar Bullish Fund (USDU). The average entry price for these bets is around 1.04300.

Key macroeconomic events this week could shape the currency market. ADP Nonfarm Payrolls (NFP) and U.S. Services PMI will be released on Wednesday, while the European Central Bank (ECB) is expected to cut interest rates by 25 basis points on Thursday. The official U.S. labour market report for February is due Friday, with market expectations leaning towards further Dollar weakness, though a positive surprise cannot be ruled out.

From a technical perspective, EURUSD is above 1.04700–1.05700. A breakthrough this resistance could unlock significant upside potential toward 1.08500 this week, with ultimate targets at 1.09500–1.10500. However, the pair must first clear resistance at 1.05600–1.05800, which remains uncertain.