US Dollar: Recovery can be undermined as pivotal events for Global FX Market are underway this week

• ECB hints at a slower rate cut approach, affecting EUR/USD's weakening trend.
• USD/JPY strengthens following Bank of Japan meeting, while Sterling remains strong against the dollar.

The ascent in 10-year bond yields from 3.8% to 4.18% since the start of the year is contributing to the robustness of the dollar, despite expectations of a weakened trajectory for the DXY this week. Major currencies, including gold, are still under pressure.

The dollar's resurgence this month is largely underpinned by data indicating the strength of the US economy. Another factor supporting the dollar is the cautious stance of Fed members, who are not inclined towards an early interest rate cut.

Nevertheless, the Fed's indication of three interest rate cuts this year has sparked speculation that the dollar's strengthening may be limited in the medium term. Nonetheless, the dollar continues to gather recovery momentum amid the prevailing uncertain environment.

EUR/USD

All attention is focused on this week's policy meeting of the European Central Bank (ECB), as market participants seek to gauge the potential timing of Federal Reserve rate cuts. Market expectations are leaning towards the possibility of the ECB implementing five rate cuts this year, surpassing the pace of the Fed.

However, the ECB has signaled a more deliberate and less aggressive approach to lowering borrowing costs, differing from what the market had anticipated.

EUR/USD has exhibited a weakening trend against the dollar this month, hinting at a potential reversal. The upward movement observed since October encountered resistance at 1.106 (Fib 0.786) by the year's end.

As the pair returns to the upper boundary of the ascending channel, it has breached the 1.09 support level, signaling a downward shift in the ascending channel starting this week.

From a technical perspective, the forecast suggests a potential downward impact on EUR/USD as long as the average remains below 1.0934. Consequently, the initial support within the lower range is likely to manifest around the 1.084 level. If this support is breached, a correction towards 1.06 may become a plausible scenario.

In the event of a potential recovery, careful attention will be directed towards the last resistance level of 1.106, particularly if there are day closes above 1.0934. Further upward movements beyond this level could prompt consideration of the upper boundary of the ascending channel and the 1.12 range, corresponding to the peak observed in July 2023.

USD/JPY

The Bank of Japan initiated its two-day meeting today, with reduced expectations of a departure from negative interest rates, especially in the aftermath of the earthquake on the first day of the year.

Although the yen experienced significant depreciation against the dollar last year, the USD/JPY pair shifted its trajectory upward, driven by renewed demand for the dollar after dipping to 140 in the final months of the year.

In the ongoing upward movement since the start of the month, the Fib 0.618 value at 147.5 has transformed into support for USD/JPY after a swift passage.

While the pair has maintained a steady course over the last three days, the 149.4 level will be closely monitored as the nearest resistance, with expectations for movement following decisions made during the BOJ meeting.

Beyond this level, assuming the BOJ adheres to its existing policy, it could potentially open the door to new peaks and formations in the medium term, reaching levels around 154 - 158. However, a potential weakening of the dollar, contingent on whether the Fed initiates interest rate cuts in the second half of the year, may act as a factor in slowing the upward trend.

GBP/USD

Sterling maintains its robust performance against the dollar, underpinned by the belief that the Bank of England will not hastily implement interest rate cuts, despite heightened inflation in the UK, contrasting the ECB and the Fed.

The GBP/USD pair has remained stable around 1.27, diverging from the downward trend observed in the euro and Japanese yen against the dollar since the beginning of the year. Consequently, the exchange rate has effectively sustained the recovery momentum initiated in October.

From a technical standpoint, it's worth noting that GBP/USD has encountered resistance at Fib 0.618 since December, a result of the retracement in the July-October period last year.

While this region presents a challenge for the pair, a breakout with a weekly close following a potential pullback towards the 1.26 level could strengthen a retracement towards the 1.23 level.

On the positive side, a weekly close surpassing the 1.27 range could spur an increase in sterling, potentially driving the pair towards the resistance zone within the 1.288 - 1.308 range in the short term.