US Dollar at Critical Juncture after US CPI, Setups on EUR/USD, USD/JPY, GBP/USD

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U.S. interest rate expectations have shifted in a more dovish direction over the past few trading sessions, despite higher-than-expected U.S. inflation figures. Traders are now discounting more than 155 basis points of easing for the year, compared to 130 basis points before the end of last week. Against this backdrop, the U.S. dollar, as measured by the DXY index, has halted its recovery, pushing towards the 102.00 level.

The chart below displays the implied yields for all 2024 Fed funds futures contracts.

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Source: TradingView

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Although the Fed is poised to reduce borrowing costs in 2024 in line with its guidance, the deep cuts priced in by the markets are unlikely to materialize. With the U.S. economy holding up remarkably well and progress on disinflation stalling, policymakers will be reluctant to adopt a very accommodative stance for fear of further loosening financial conditions and complicating the path to price stability.

In light of recent developments, it wouldn't be surprising to witness Fed officials taking a proactive stance in the coming days and weeks to push back against the excessively dovish outlook contemplated by Wall Street. This strategy could help stabilize Treasury yields before a potential turnaround, a scenario that could be bullish for the broader U.S. dollar in the near term.

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EUR/USD displayed a subdued performance on Friday, but maintained its position above technical support at 1.0930. Should this floor hold firm, there is potential for the pair to resume its upward trajectory in the coming trading sessions, with a move toward 1.1020 being within reach. Continued strength may then redirect focus to 1.1075/1.1095, followed by 1.1140.

Conversely, in the scenario where bearish momentum accelerates and the exchange rate falls below 1.0930, a retracement towards 1.0875 becomes plausible. This particular region holds significance as it aligns with both the 50-day simple moving average and the lower boundary of a short-term ascending channel. Further weakness in the market could potentially lead to a retest of the 200-day SMA.


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EUR/USD Chart Prepared Using TradingView

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GBP/USD was largely flat on Friday, trading slightly below overhead resistance at 1.2765. Sellers must defend this ceiling at all costs; failure to do so could spark a rally toward the December highs located above the 1.2800 handle. On further strength, the bulls may get the courage to initiate an assault on the psychological 1.3000 level.

On the flip side, if bearish pressure resurfaces and cable pivots lower, initial support appears at 1.2675, which corresponds to the lower limit of a medium-term ascending channel. While prices are likely to bottom out in this area on a pullback, a breakdown could pave the way for a drop towards 1.2600. Subsequent losses from this point onward could bring the 200-day SMA into play.


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GBP/USD Chart Prepared Using TradingView

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Change in Longs Shorts OI


USD/JPY rallied earlier this week, but its ascent lost impetus as prices struggled to surpass resistance at 146.00. To reignite upward momentum, a clear and decisive push above the 146.00 mark is required – a level that aligns with the 50-day simple moving average. Such a development might pave the way for a rally towards the 147.00 handle.

Conversely, if sellers regain firm control of the market, initial support looms at 144.65. Bulls need to staunchly protect this floor; failure to do so could usher in a pullback towards the 200-day simple moving average in the vicinity of 143.60. Subsequent losses could attract attention to the December lows below the 141.00 threshold.


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USD/JPY Chart Created Using TradingView

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