The Euro Is Diving Into Correction

The U.S. Dollar Index (DXY) is rising by 0.29% to 104.40 points, while EURUSD is down by 0.21% to 1.07860, hovering near its March 7 lows. This signals a correction following a two-week consolidation, during which the pair tested resistance at 1.09500–1.10500. Despite this decline, overbought pressures remain.

However, large investors appear to be betting on a weaker dollar. The WisdomTree Bloomberg US Dollar Bullish Fund (USDU) reported net outflows of $64.59 million last week, even as the dollar strengthened. While this could be partially attributed to portfolio rebalancing ahead of the triple witching day on March 21, it does not fully explain the broader dips in the currency market.

The Federal Reserve (Fed) has made a decisive shift toward monetary easing, announcing that it will slow the pace of its balance sheet drawdown to $5.0 billion per month from the current $25.0 billion starting April 1. Chair Jerome Powell reassured markets that any inflationary effects from tariffs would be temporary and that recession risks remain low. The Fed still plans at least two interest rate cuts this year, which should ultimately weigh on the dollar, though not necessarily at current levels.

In the longer term, a potential divergence between the European Central Bank’s tightening and the Fed’s easing could push EURUSD toward 1.15000–1.20000. However, betting on this scenario now would be highly speculative.

The dollar has received some support from Monday’s PMI data. While Manufacturing PMI slipped into contraction territory at 49.8 points, Services PMI jumped to 53.5 from 51.6. Given the dominance of the services sector in the U.S. economy, this is a bullish signal that could also improve Q1 2025 GDP estimates. Investors are now looking ahead to Friday’s release of the February PCE index to confirm whether inflation is continuing to slow.

From a technical perspective, EURUSD remains overbought and needs further correction toward 1.06000. The likelihood of the pair breaking above 1.10500 has significantly diminished, clearing the path for a continued downside move.