Dollar in a Downside Effort before the Fed Meeting

The U.S. Dollar Index (DXY) is down 0.44% this week, trading at 103.26, while the EURUSD pair has risen by 0.75% to 1.09530, its highest level since November 6, 2024. There has been no downside correction in the pair following the release of softer U.S. inflation data.

February inflation fell to 2.8% year-on-year from 2.9%, marking its lowest level since November 2024. The Producer Price Index also declined to 3.2% YoY from 3.7%. Last week, the EURUSD climbed 0.36% to 1.08710 in response to the data. The weaker dollar was further pressured by a sluggish recovery in consumer spending, with February retail sales rising just 0.2% MoM, well below the 0.6% forecast. This suggests a cooling U.S. economy, reinforced by the Atlanta Federal Reserve’s GDPNow model, which now projects a 2.1% QoQ contraction in Q1 2025, slightly improving from the previous estimate of a 2.4% decline. However, this still disappointed investors and weighed on the Dollar.

Across the Atlantic, Germany’s Bundestag is set to vote on a historic multi-billion-euro financial package on Tuesday. The proposal, introduced by incoming German Chancellor Friedrich Merz, aims to loosen the existing debt brake and enable around €900 billion in new investments in defence, infrastructure, and climate initiatives. Anticipation of this decision drove the EURUSD higher by 5% last week. However, any delays in voting could trigger a pullback in the pair, while approval of the package might either push it towards 1.10500 or prompt an immediate sell-off.

The Federal Reserve meeting on Wednesday will be a key event for the Dollar. U.S. President Donald Trump and Treasury Secretary Scott Bessent have placed blame on the central bank for the market correction and economic slowdown. If Fed Chair Jerome Powell takes responsibility, policymakers could ease their rhetoric, citing progress in lowering inflation. Given the macroeconomic backdrop, such a stance would be positive for equities but would signal further weakness for the Dollar.

In this uncertain environment, even large investors are avoiding the market. Last week, they sold WisdomTree Bloomberg US Dollar Bullish Fund (USDU) shares worth $10.89 million at a loss, fully erasing their previous $63.73 million bet on a rising Dollar.

Technically, the EURUSD remains under significant overbought pressure, which could trigger a correction towards 1.06000. However, a spike to 1.10500 is still possible before a pullback materialises.