Scotiabank analysts Shaun Osborne and Eric Theoret report that the US Dollar (USD) is broadly firmer as risk aversion dominates global markets, with equities declining and oil prices rising. The US Dollar Index (DXY) has stalled its broader drift from late June highs around the 100.5 support level, but late-week price action still threatens a bearish weekly close, which could signal further losses unless a significant rally occurs before the week's end [1]. The analysts argue that current OIS pricing for a year-end Federal Reserve hike is too aggressive, suggesting that the USD could weaken as swaps reprice [1].
Meanwhile, the Euro (EUR) has experienced a modest pullback against the USD in quiet trading conditions as markets await next week’s European Central Bank (ECB) policy decision. Policymakers are currently in a blackout period, and implied volatility remains subdued, reflecting little market concern about any significant surprises from the ECB. Both Scotiabank and market consensus expect no policy change at the upcoming meeting [2].
Short-term, the EUR maintains a mild uptrend against the USD, but a break of mid-1.14 support has dulled bullish momentum, with the potential for EUR/USD to test support at 1.1395/1.1405 in the near term [2]. Eurozone CPI was finalized at –0.1% month-over-month in June and up 2.8% year-over-year, while the Eurozone reported a EUR25.1 billion current account surplus for May [2].
Overall, the market is characterized by risk-off flows, with equities under pressure due to renewed concerns about the tech/chip cycle and escalating US/Iran tensions. Bonds are firmer, particularly US Treasurys, as investors seek safety [1]. The USD's near-term direction remains uncertain, hinging on technical support levels and the potential repricing of Fed rate hike expectations [1].
CONCLUSION
The US Dollar is currently supported by risk-off sentiment, but faces downside risks if technical support fails and Fed hike expectations are repriced. The Euro has pulled back ahead of the ECB meeting, with no major policy changes anticipated. Market participants remain cautious, with attention focused on upcoming central bank decisions and key support levels.