Dollar Is Ready to Lose Its Weight

The U.S. Dollar index (DXY) has declined by 0.5% to 101.83 this week, reflecting a weakening of the Dollar against other major reserve currencies, with losses ranging from 0.4% to 1.3%. The EURUSD pair has risen by 0.5% to 1.10800, continuing its upward momentum. This shift in the Dollar's trajectory was largely influenced by U.S. inflation data for July. Producer prices fell to 2.2% YoY, which was better than expected, prompting the EURUSD to gain 0.6% to 1.09990. Consumer prices followed suit, slowing to 2.9% YoY in line with forecasts, which led to an additional 0.5% increase in the EURUSD to 1.10470. These developments pushed the pair into the 1.10000-1.11000 range.

Despite some concerns from declining initial jobless claims and rising retail sales in the U.S., the inflation figures have overshadowed these factors, driving the EURUSD to close last week at 1.10180, its highest since December 28, 2023. The pair is now poised for a potential rally toward the 1.14000-1.15000 range. However, for this bullish scenario to play out, the EURUSD needs to climb above 1.11400, which is just 0.5-0.6% above current levels. There are, however, technical challenges ahead. The pair is currently overbought, which could make the rally fragile and susceptible to a sudden decline, potentially turning into a bullish trap.

Given this uncertainty, it would be prudent to observe the actions of large investors. However, there have been no recent updates on fund flows into the WisdomTree Bloomberg US Dollar Bullish Fund (USDU), leaving the trend somewhat ambiguous. While recent trends favor a weaker Dollar, it's possible that large investors may have shifted their sentiment.

In this complex situation, it may be wise to wait for clarity from a major upcoming event—Federal Reserve (Fed) Chair Jerome Powell's keynote speech at the Jackson Hole central bankers' meeting this Friday. Powell is expected to outline plans for potential interest rate cuts in the coming year. Given the elevated expectations, any deviation from these expectations could impact the market significantly. If Powell adopts a neutral stance, which might be the most prudent course, the sell-off in the Dollar could pause, keeping the EURUSD range-bound between 1.10000 and 1.11400. This pause would allow the pair to ease its overbought condition and prepare for the U.S. labor market report for August, due on September 6.

During this period, large investors could establish a more solid foundation for future moves, helping to avoid potential traps and positioning themselves for the next significant market shift.