US Dollar Bounce Looks Vulnerable, EUR/USD Respects Resistance for Now

US inflation came in broadly in line with expectations, sending expectations of a September hike down to 40% from 55% just over a week ago. Though it seems forex traders may have been positioned for a weaker set of figures, given the US dollar index traded higher on Wednesday. Yet as I outline below, I do not have great confidence in this supposed US dollar bounce, and suspect we saw a significant high on the dollar back in June. Even so, with the US dollar index showing the potential to extend its lacklustre bounce, it could see EUR/USD retreat further below its 200-day EMA before the next leg of an anticipated move higher unfolds.

View related analysis:

US Dollar Index (DXY) Technical Analysis

While the dollar is retracing higher for now, bulls are making hard work of the gains – and clues from the weekly chart suggest further losses could await as the year progresses.

We may have seen a significant high in the week of June 22, with a double top and bearish engulfing week also forming around 100.50. For now, I suspect it marks the completion of the correction from the January low, with momentum having realigned with the selloff from the January 2025 high (which itself is a lower high relative to 2022).

For now, momentum is pointing higher from the 50-week EMA and 200-day EMA, as prices manage to hold above the January trendline – just. Yet daily trading volumes remain low and beneath their 20-day average to show a lacklustre effort form bulls. And with the 100 handle, July low (10.15) and monthly pivot point (100.28) nearby for potential resistance, the upside for the US dollar could also be limited.

That said, this is not to say the USD will simply roll over either, with the 99.17 high-volume node (HVN), monthly S1 pivot point (99.08) and 99 handle nearby. But it could at least mean the retracement higher on DXY could be limited, and therefore pullbacks on EUR/USD, AUD/USD and others could be on the smaller side before they try to move to new highs. We also need to see the US dollar break beneath the 98.70 low before assuming the wheels have truly fallen off and that the bigger move for bears is back underway.

Source: ICE, TradingView

EUR/USD Technical Analysis: Euro vs US Dollar

A higher US dollar naturally means a weaker euro, with EUR/USD accounting for ~57% of the DXY basket.

The daily chart shows near-term bearish signals which hint at a retracement lower. EUR/USD is yet to see a daily close above its 200-day EMA, despite intraday spikes above it. And bulls have made a bit of a mess of invalidating the 2026 bearish trendline. But even if EUR/USD does provide a deeper p[...].

The weekly chart shows support was found at the May VPOC ahead of a higher low and bullish outside week. This suggests to me that a significant swing low was seen in June, and that EUR/USD is trying to break higher after its minor pullback over the near term. Beyond the pullback, I am on the lookout for a swing low and potential rally up to the 1.16 handle, June VPOC (1.1612) and high-volume node (1.1644).

Source: ICE, TradingView

USD Bullish Exposure Falls as EUR/USD Sentiment Improves | COT Report

It is worth noting that traders remained heavily net-long US dollar index futures as of last Tuesday’s close, although bulls are clearly questioning their level of exposure. Net-long exposure to the US dollar via the futures market declined by $12.5 billion from the week prior – the fastest reduction of longs in nearly two years and the second-fastest in six. Net-long exposure had also risen to just $3 billion shy of its all-time high, hinting at a bullish sentiment extreme. Asset managers also reduced their net-long exposure to US dollar index futures from a 19-month high, so questions are clearly being asked by USD bulls regarding their level of bullish exposure.

Meanwhile, large speculators reduced their net-short exposure to EUR/USD futures from their most bearish level since December 2024. Asset managers remained net-long and slightly increased their bullish exposure. Of course, this is weekly delayed data, so it is best used to gauge sentiment rather than as a timing cue for trades on lower timeframes. But when you put the clues together, I see the potential for a more bullish euro and less dominance from USD bulls in the coming weeks.

Source: CME, IMM, CFTC (COT), LSEG

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-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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