Dollar May Slip Down After ECB Meeting

The U.S. Dollar index (DXY) is up by 0.1% to 103.09 points this week, while the EURUSD is down by 0.2% to 1.09090. Although the Dollar has been strengthening over the past three weeks, its momentum appears to be waning. The EURUSD dropped by 1.7% to 1.09640 in the first week and by 0.3% to 1.09300 in the second. This week, the pair may trade flat or even rise, given the current trend.

Large investors are also positioning for a weaker Dollar. The WisdomTree Bloomberg US Dollar Bullish Fund (USDU) reported no changes in inflows or outflows last week, and investors have withdrawn $3.9 million from the fund over the past seven weeks. This suggests that expectations of further Dollar strengthening are low, at least until the U.S. presidential elections on 5 November.

The main event that could impact the EURUSD pair this week is the European Central Bank (ECB) interest rate decision on Thursday. The ECB is anticipated to cut rates by a quarter point to 3.40%. Should the ECB fail to deliver this cut, the Dollar could weaken significantly. However, ECB President Christine Lagarde announced this plan weeks ago, giving traders ample time to adjust their strategies in advance.

Additionally, U.S. retail sales data for September could lend some support to the Dollar if the forecast of a 0.3% month-on-month increase is met. Otherwise, the Dollar might face a sharp correction. Technically, the EURUSD has strong support at 1.08500-1.09000 and strong resistance at 1.10500-1.11000. A decline below 1.09500 could drive the pair towards the support level, while a rise above 1.09600 could push it towards the resistance.

Given these factors, Thursday could bring unexpected volatility to the pair.