US Dollar Gains Before US Inflation, Volatility Ahead

US DOLLAR FORECAST – EUR/USD, USD/JPY

• U.S. dollar finds stability and rebounds modestly on Monday after a sharp sell-off last week
• The upcoming U.S. inflation report will play a pivotal role in shaping the market’s near-term trajectory.
• This article focuses on the technical outlook for EUR/USD and USD/JPY

Most Read: US Dollar Forecast – US CPI to Spark Next Big Move – EUR/USD, USD/JPY, GBP/USD

The US dollar found its footing on Monday, snapping a losing streak that dragged the DXY index to its weakest point since January Friday. Before today’s modest bounce, the greenback has been losing ground steadily amid falling U.S. yields on expectations that the FOMC would soon start easing.

Last week, Fed Chairman Powell, in an appearance before Congress, indicated that it will likely be appropriate to begin dialing back policy restraint at some point this year, noting that policymakers need “just a bit more evidence” that inflation is moving sustainably towards 2.0% before pulling the trigger.

Powell’s comments, combined with mixed U.S. employment data showing a slight uptick in the jobless rate in February, bolstered bets that the central bank’s first cut of the cycle will arrive in June, an event that reinforced the U.S. currency’s downturn.

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Although the outlook for the U.S. dollar has turned more negative in recent days, traders should not entirely rule out the potential for a comeback. That said, one potential catalyst that could trigger a bullish turnaround is the upcoming U.S. consumer price index report, due for release on Tuesday morning.

UPCOMING US CPI DATA

Source: DailyFX Economic Calendar

Projections indicate that February’s headline CPI is poised to stay unchanged at 3.1% year-on-year. Simultaneously, the core index, excluding energy and food components, is anticipated to decelerate modestly to 3.7% from its prior reading of 3.9%.

In terms of possible outcomes, stronger-than-forecast inflation figures, mirroring January’s upside surprise, should throw a wrench in the easing narrative, prompting Wall Street to reevaluate the likely timing of rate cuts by the FOMC. Such a situation would be positive for the U.S. dollar.

Conversely, if CPI numbers come below consensus estimates by a wide margin, the market response should be the opposite. This scenario would strengthen the belief that a downshift in interest rates is imminent, driving bond yields lower and boosting the dollar in the process.

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EUR/USD FORECAST – TECHNICAL ANALYSIS

EUR/USD edged lower on Monday, retracing towards the 1.0900 handle. If losses accelerate in the coming days, support looms at 1.0890. Below this area, all eyes will be on 1.0850, where multiple moving averages intersect with a significant upward trendline.

On the other hand, if buyers return and re-establish dominance, prices are likely to climb back towards 1.0980. The market’s response at this juncture will be crucial, as a breakout could pave the way for a rally towards 1.1020. Subsequent strength would then shift focus to 1.1075.

EUR/USD PRICE ACTION CHART

EUR/USD Chart Created Using TradingView

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USD/JPY FORECAST – TECHNICAL ANALYSIS

USD/JPY extended its decline on Monday, falling towards confluence support spanning from 146.50 to 146.00. This range marks the convergence of a key trendline, the 200-day simple moving average, and February’s swing low. Additional losses from this point forward will put focus on the 145.00 level.

Conversely, if buyers mount a comeback and trigger a rebound, resistance is anticipated around 147.50. Beyond this technical ceiling, the spotlight will be on 148.90. Advancing further, market attention might transition towards 149.70, then onto 150.90.

USD/JPY PRICE ACTION CHART

USD/JPY Chart Created Using TradingView