- The US dollar’s bounce has legs—for now—but resistance is closing in.
- Trump’s tariff pause lifted risk appetite, but long-term doubts still loom.
- With DXY facing a key test and critical data ahead, the greenback’s fate hangs in the balance.
The US dollar has had a decent day yesterday, especially against the Japanese yen. But it was higher even against the commodity dollars despite a sharp improvement in risk appetite. We had stronger consumer confidence data, while news from Japan weighed heavily on the yen, supporting the USD/JPY and other yen crosses. That momentum initially carried over into today’s session. But the lack of any major fresh news caused the greenback to then turn flat. While still higher for the week, key US data on Thursday and Friday will determine whether the recovery has any legs. From a technical perspective, the DXY was testing a key resistance zone between 99.58 to 100.15.
Is It Too Soon To Turn Positive on US Dollar Forecast?
One wouldn’t be terribly surprised to see the dollar come under renewed pressure as the week unfolds—this, even after President Trump’s somewhat abrupt U-turn on the 50% EU tariff threat. May was meant to usher in a new phase of trade diplomacy, with tangible progress on agreements. Of course, no one expected Brussels to be straightforward, but the latest flare-up with the EU serves as a timely reminder: trade spats and tariff theatrics have a nasty habit of resurfacing with little warning. If recent events taught us anything, it’s that the dollar tends to suffer most when such sabre-rattling resumes.
The US dollar index, while modestly undervalued —an imbalance that’s lingered for some time—remains hemmed in by concerns around the long-term viability of US public finances. Investors, quite rightly, are now forced to account for a landscape shaped as much by erratic policy as by economic fundamentals.
Trump’s U-Turn Boosts Risk Appetite
President Trump’s decision to postpone the threatened 50% tariffs on the EU has led to a sharp bounce in risk trade at the start of the week, and this is one of the factors weighing on haven assets like gold and the yen, even if both have rebounded slightly so far on Wednesday’s session. But after the dollar’s recovery yesterday, has the trend turned positive in the near-term outlook for the greenback? This shift came after what was described as a constructive call with the President of the European Commission. The announcement, which emerged over the weekend, has since sparked a rebound in risk assets, particularly in European stock markets. But the news has also boosted the appeal of the US dollar, which had been under pressure against almost all major currencies amid tariff uncertainty. In the first half of Wednesday’s session, Nasdaq 100 futures drifted a little lower ahead of Nvidia’s (NASDAQ:NVDA) earnings. But the trend in the stock markets is clearly bullish.
Keep An Eye on the Yen
The USD/JPY pair has a big influence on the dollar index given the yen’s 13.6% weighting. After Tuesday’s big rally, let’s see if there is more upside for the USD/JPY or we quickly go lower again. The yen fell sharply after reports suggesting that Japan is weighing a reduction in long-dated bond issuance caused a dip in long-term yields. Yields and the yen have both bounced back a little, but let’s see if this is just a bounce or a trend resumption. Concerns have been mounting over rising yields, particularly at the long end of the JGB curve. The hope is that by reducing supply in this segment, this should lend support to bond prices and ease yield pressures, which is precisely what we saw during yesterday’s session. While the final debt issuance breakdown for the next fiscal year isn’t expected until June, the market has already responded. The yen weakened broadly against its major counterparts on Tuesday, but it remains to be seen whether the move can hold.
US Consumer Confidences Surprises
Turning to the US data, today’s highlights include Richmond Manufacturing Index and FOMC minutes. It is also worth watching Nvidia’s earnings after the close, which may influence the dollar given the company’s size and influence on the stock markets. Yesterday, all eyes were on the Conference Board’s Consumer Confidence report. This was expected to show a modest rebound to 87.1, up from last month’s five-year low of 86.0. However, as it turned out, the data was actually quite strong at 98.0. This led to further dollar appreciation when it was released.
For the dollar to regain its footing, incoming data will need to soothe fears of a looming recession. That’s increasingly crucial, given that deficit anxieties are beginning to erode what little stability the currency still enjoys. The concern isn’t that Trump’s spending proposals will immediately blow the fiscal doors off. Rather, it’s that Washington has, yet again, let a golden opportunity to address the deficit quietly slip away. Looking ahead, doubts around US creditworthiness could remain a persistent headwind, particularly if upcoming Treasury auctions reflect only tepid investor appetite.
Later in the week, we have Prelim GDP, Unemployment Claims and Pending Home Sales all to look forward to on Thursday. Friday’s data highlights include Core PCE Price Index, personal spending and income, and Revised UoM Consumer Sentiment.
Technical Analysis: DXY Testing Key Resistance
As can be seen on the chart, the dollar index is testing a key area of potential resistance between 99.58 to 100.15. This zone was previous support and resistance. As long as this area holds as resistance now, the path of least resistance for the DXY remains tilted to the downside, despite this week’s recovery. The US dollar direction will only improve from a technical stand point if we were to see the DXY not only break back above this zone, but to then show upside follow-through. Support is seen around 99.00, then the April low of 97.92 comes into focus.
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