US Dollar Comes Alive as Yields Fly, Setups on EUR/USD, GBP/USD and USD/JPY

US DOLLAR FORECAST – EUR/USD, GBP/USD, USD/JPY

• The U.S. dollar accelerates higher as U.S. Treasury yields extend rebound following a poor performance in late 2023
• Attention will be on the ISM manufacturing survey and the U.S. nonfarm payrolls report later in the week
• This article focuses the outlook for the U.S. dollar, analyzing price action for major pairs such as EUR/USD, GBP/USD and USD/JPY ahead of high-impact events later in the week.

Most Read: US Dollar Q1 Fundamental Outlook: A Tale of Two Halves – Weak Start, Strong Finish

The US dollar, as measured by the DXY index, started the new year on the front foot, rising for the third consecutive session, supported by a rebound in U.S. Treasury yields, with the 10-year note up 7 bp to 3.93%. In this context, the DXY index climbed 0.7% to 102.10 in early afternoon trading in New York, posting its biggest daily advance since October, ahead of high-impact events later in the week.

Key releases, including the ISM manufacturing survey and the U.S. nonfarm payrolls report (NFP), will give an opportunity to assess the economic outlook and ascertain if projections of aggressive interest rate cuts for 2024 hold merit. As a frame of reference, traders currently discount 142 basis points of easing over the next 12 months, as shown in the chart below.

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2024 Fed Funds Futures (Implied Rate by Monthly Contracts)

Source: TradingView

If manufacturing activity accelerates in a meaningful way and employment growth surprises to the upside, investors are likely to pare bets on deep interest-rate cuts, foreseeing that the Federal Reserve will be reluctant to slash borrowing costs substantially in a stable economy for fear of reigniting inflation. This scenario would be bullish for the U.S. dollar.

On the flip side, if the data disappoints and shows cracks in the economy, especially in the labor market, it would not be surprising to see the Fed’s policy outlook shift in a more dovish direction, an outcome that would put downward pressure on yields and, by extension, the U.S. dollar. Any NFP print below 100,000 is likely to produce this response.

The image below shows consensus forecasts for ISM and NFP.

Upcoming US Economic Data

Source: DailyFX Economic Calendar

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EUR/USD TECHNICAL ANALYSIS

EUR/USD rallied to multi-month highs in late December, but pivoted lower after failing to clear channel resistance near 1.1140, with the pair sinking towards 1.0935 on Tuesday. The pair is likely to bottom out in this region before initiating the next leg higher, but in the event of a breakdown, a move towards channel support and the 200-day simple moving average near 1.0840 could unfold quickly.

Conversely, if the bulls regain decisive control of the market and trigger a turnaround, the first line of defense against future advances is located at 1.1020, followed by 1.1075/1.1095. Sellers need to defend this band at all costs – failure to do so could result in a rally towards channel resistance, presently positioned above 1.1170.

EUR/USD TECHNICAL CHART

EUR/USD Chart Created Using TradingView

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GBP/USD TECHNICAL ANALYSIS

GBP/USD also sold off on the first trading session of 2024, slipping below 1.2675 and pushing towards confluence support around the 1.2600 handle, where several swing lows align with the lower limit of a short-term rising channel. It is crucial that this technical floor holds in the coming days, as a breakdown could spark a decline toward the 200-day simple moving average.

In contrast, if selling pressure abates and cable perks up, resistance looms at 1.2675, and 1.2765 thereafter. On further strength, the focus shifts to last month’s peak near 1.2830. Overcoming this hurdle will present a formidable challenge for the bullish camp, but a breakout could pave the way for a potential climb towards the psychological 1.3000 level.

GBP/USD TECHNICAL CHART

GBP/USD Chart Created Using TradingView

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USD/JPY TECHNICAL ANALYSIS

USD/JPY rallied off support on Tuesday but fell short of recapturing its 200-day simple moving average. If the pair stays below this indicator for too long, sellers could reload and make a comeback, setting the stage for a drop below 140.95, but further losses could be in store on a push below this threshold, with the next area of interest at 139.85.

On the other hand, if the bulls manage to propel the exchange rate above the 200-day SMA around 143.00, we could see a rally towards 144.80. Surmounting this obstacle may be difficult, but a successful push above it could establish favorable conditions for an upward move toward the 146.00 handle. Sustained strength might embolden the bulls to aim for 147.20.

USD/JPY TECHNICAL CHART

USD/JPY Chart Created Using TradingView