On Thursday, dollar bears are taking a pause ahead of the release of key data on US economic growth.
Yesterday, the greenback fell by about 0.4% to 101.20 against its main competitors, trimming almost all gains posted the day before.
The prospects of a recession in the US in the second half of 2023 are damping demand for the dollar. Expectations of the Fed's rate cut by the end of the year are also exerting pressure on the US currency.
Next week, the Fed is forecast to deliver a final 25-basis-point interest rate increase to the range of 5-5.25%.
At the same time, there is an increasing likelihood that borrowing costs in the US will decrease to 4.25-4.50% by December.
If there was a 20% chance of such an outcome last week, now it is about 40%.
Some traders believe that the Fed will not raise the rate at the next meeting to avoid spreading financial contagion in the economy.
The focus of investors is still on First Republic Bank remains. The bank's stock quotes plummeted by almost 30% on Wednesday.
According to the Financial Times, the institution, along with US regulators, is exploring ways to stabilize its business. It reportedly considers selling its whole business or just parts of it.
This raises questions about the future of not only First Republic Bank but also other regional lenders in the US.
In the face of ongoing uncertainty over the world's largest economy, it is difficult for the dollar to attract buyers. Further disputes in Washington over the US debt ceiling do not add optimism.
Yesterday, the House of Representatives barely passed a bill to raise the debt ceiling. However, the bill is unlikely to pass the Senate, which is controlled by the Democrats.
On Wednesday, US Treasury Secretary Janet Yellen said that Congress should raise the debt ceiling or the statutory debt limit should be abolished.
In turn, Joe Biden said he would veto the debt bill if it passed Congress.
Against this background, the yield on the benchmark 10-year US Treasury note fell by 3.38%, hitting a two-week low around and dragging the dollar down.
Apparently, greenback bulls were disappointed that the Atlanta Federal Reserve lowered its forecast for US GDP growth for the first quarter to 1.1% from the expected 2.5% a week ago.
The reason for the revision was data on US durable goods orders for March. The indicator rose by 3.2% month-on-month, exceeding the anticipated increase of 0.7%. However, orders for non-defense capital goods excluding aircraft fell by 0.4%, which added to concerns about an economic downturn. As a result, the greenback came under pressure and closed in negative territory on Wednesday.
On Thursday, the US currency is almost unchanged against major currencies as investors are awaiting US GDP data, which is expected to show a 2% increase on an annual basis.
These data are retrospective and are unlikely to have a significant impact on market expectations of the Fed's rate hike by 25 basis points at the meeting to be held next week.
However, weak figures could raise concerns that the US economy will slide into a recession later this year. In such a scenario, the Fed's policy stance will become more dovish and result in a weaker dollar.
Meanwhile, an unexpected rebound in US economic output could restore expectations that the Fed will remain focused on fighting inflation. This would increase the risks of further rate hikes by the US central bank and help the dollar recover.
"We expect the FOMC will raise rates by 25bp when it meets next week. That would leave the target ceiling for fed funds at 5.25% and effective fed funds in line with the median (and end 2023) dot plot of 5.10%," ANZ strategists said.
"Our baseline forecast is for one more 25bp rate rise to 5.50%. With respect to the bigger picture, however, the tightening cycle may be nearing its conclusion. We expect future rate decisions to be determined meeting-by-meeting," they added.
"Our GDP estimates expect the lagged effects of last year's rate rises to bite more deeply in Q2. We expect consumption and labor market growth to moderate. However, core services inflation ex-shelter may take time to ease," analysts at ANZ noted.
Economists at the Commonwealth Bank of Australia believe that the likelihood of more than one Fed rate hike is a bullish risk for the dollar in the coming months. According to them, US inflation remains persistently high, forcing the FOMC to further tighten policy. This is in contrast to the prevailing market expectations of an imminent end to the Fed's monetary policy tightening cycle and suggests a rebound in the greenback in case investors reassess the future of US interest rates.
However, the dollar's bullish run is likely to remain limited in the short term, especially against the euro.
Unlike its American counterpart, the single European currency is in demand among investors. Thus, its rally is likely to continue until the ECB raises rates in early May.
The European regulator is expected to raise interest rates either by 25 or 50 basis points at its next meeting and signal further rate increases.
In other words, the market expects greater rate hikes from the ECB than from the Fed. This is the main driving force behind a noticeable rise in the euro against the dollar.
Since early April, the EUR/USD pair has added more than 200 pips.
On Wednesday, it reached the area of 1.1090, hitting a new 14-month high.
"It feels as if the euro is the market's preferred currency," analysts at Commerzbank said.
"The ECB seems simply perceived as more restrictive at present thanks to the many comments from hawks on the board," which could support the EUR/USD pair.
Looking further ahead, Commerzbank economists say that one should not forget that the rate-hiking cycle in the euro area will at some point come to an end.
"The doves amongst the board will eventually attract more attention again, once the data in the eurozone begins to deteriorate," they added.
It is at this point that the dollar could potentially regain ground against the euro if interest rates in the US remain higher than in the euro area. Thus, "at some point, the good times are likely to be over for the euro." Market participants "should remember that and not be surprised when the time comes," Commerzbank pointed out.
However, macroeconomic statistics on the euro area should deteriorate significantly before such a scenario becomes a reality, especially considering that the bloc's economy continues to present positive surprises to investors.
Under such conditions, the most likely scenario for the EUR/USD pair is bullish.
On Thursday, the main currency pair is trading in a narrow range, consolidating its recent gains.
However, the Relative Strength Index (RSI) indicator remains near the 60 mark, indicating that there is still room for upside.
In addition, there is still a gap between the 21- and 50-day moving averages, which signals that market sentiment remains bullish.
The first resistance level is at 1.1100. The next one is at 1.1150. If the price closes above the latter, EUR/USD will probably advance to 1.1200 before heading toward the 1.1300 mark.
In the meantime, as long as the pair is trading below the multi-month high of 1.1090, the risk of a pullback remains high.
The nearest support level lies at 1.1000. The next ones are at 1.0900 and 1.0780.
At the same time, the medium-term upward trend will remain intact if EUR/USD consolidates above the level of 1.0830.
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