US Dollar rebound reverses Euro’s early gains

1.1213: Euro slips towards this level as the US Dollar recovers.
Rising oil prices appear to underpin the US Dollar’s rebound.
Fiscal risks in France spread across other Eurozone countries.

The Euro (EUR) is little changed near 1.1213 against the US Dollar (USD). Earlier gains have evaporated during Tuesday’s European session as another rise in oil prices drives a sharp US Dollar recovery, pulling the major currency pair lower.

From an intraday low of 101.74, the US Dollar Index (DXY) recovers towards 101.91 in European trading. The index, which measures the Greenback against six major currencies, nevertheless remains 0.13% lower.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

A 2.15% surge takes WTI Oil towards $100.20, its highest in over a month. Conflict in the Middle East continues to lift the oil risk premium as Iran threatens to extend its blockade to other sea routes.

As rising oil prices unanchor global inflation expectations, the likelihood of central bank interest rate increases grows.

Over the past week, concerns surrounding Artificial Intelligence (AI)-related optimism have weighed on the US Dollar’s performance.

Strong AI-driven foreign investment has supported US financial markets, according to MUFG analysts, who describe them as “a major beneficiary of strong foreign investor demand driven by AI-related optimism.” On the scale of that demand, they report that foreign investors bought “USD942 billion of US equities in the twelve months to July, while purchases of US corporate bonds increased sharply to USD452 billion over the same period.” In MUFG’s assessment, these “sizeable inflows highlight how the USD has become increasingly tied to investors’ search for higher returns in US financial markets, rather than benefiting from its traditional safe-haven status.” Their warning, however, is that “this dynamic also leaves the USD more exposed to a reversal if sentiment towards AI deteriorates.”

The Euro’s appeal has also weakened as fiscal turmoil in France spills over into other Eurozone countries.

The latest political upheaval in France has reverberated through European markets, Deutsche Bank analysts say, observing that “those market concerns around French debt cascaded across other countries and asset classes too.” Illustrating the wider impact, they add that “the Italian 10yr spread over bunds was also up +4.7bps on the day to 111bps, whilst Spain’s was up +1.2bps to 62bps.”

1.1273 EMA Caps EUR/USD: Technical Analysis

At 1.1219 on the daily chart, EUR/USD retains a bearish near-term outlook below its 20-period exponential moving average (EMA) of 1.1273. Failure to regain this short-term average indicates that overhead selling is limiting rallies. The Relative Strength Index (14), at 38.5, also remains beneath the neutral 50 threshold, signalling persistent downward pressure rather than a convincing recovery.

Clearing immediate resistance at the 20-period EMA of 1.1273 would be necessary to reduce the bearish bias and allow a more durable rebound. Below that threshold, advances towards the EMA are likely to encounter fresh selling. With few nearby technical supports visible on the chart, a return of seller control would leave the pair exposed to further declines.

(The technical analysis of this story was written with the help of an AI tool. Learn more.)

US Dollar: Key Questions

What role does the US Dollar play?

More than 88% of global foreign exchange turnover involves the US Dollar (USD). According to 2022 data, that represents average daily transactions of $6.6 trillion, making it the world’s most actively traded currency. The USD is the official currency of the United States of America. It also circulates alongside local banknotes as the ‘de facto’ currency in a significant number of other countries. After the Second World War, the USD displaced the British Pound as the global reserve currency. Gold backed the US Dollar for most of its history, until the Gold Standard ended with the Bretton Woods Agreement in 1971.

How does Federal Reserve policy affect the US Dollar?

Monetary policy set by the Federal Reserve (Fed) is the single largest influence on the US Dollar’s value. Adjusting interest rates is the Fed’s main means of fulfilling its two mandates: price stability, through controlling inflation, and full employment. Inflation above the Fed’s 2% target, with prices rising too rapidly, prompts rate increases that support the USD. Conversely, the Fed may cut rates if inflation drops below 2% or the Unemployment Rate becomes too high, putting downward pressure on the Greenback.

How does Quantitative Easing work, and what does it mean for the US Dollar?

When conditions become extreme, the Federal Reserve can create additional Dollars through quantitative easing (QE). This policy substantially expands credit flows within a financial system that has become blocked. As an unconventional measure, QE addresses a shortage of credit caused by banks refusing to lend to one another for fear of counterparty default. It serves as a last resort when interest rate cuts alone are unlikely to deliver the required outcome. During the Great Financial Crisis in 2008, the Fed chose QE to tackle the credit crunch. The process entails printing more Dollars to purchase US government bonds, mainly from financial institutions. A weaker US Dollar is the usual result.

How does Quantitative Tightening work, and what does it mean for the US Dollar?

Usually supportive of the US Dollar, quantitative tightening (QT) reverses the QE process. The Federal Reserve ceases bond purchases from financial institutions and no longer reinvests principal from maturing bond holdings in new purchases.