Is it the End of DXY Strength?

USD – Strong, but Starting to Slip

The U.S. dollar has had an impressive run, driven by a combination of strong economic data, persistent inflation, and a hawkish Federal Reserve. But the winds are starting to shift. GDP growth has cooled more than expected, job market strength is beginning to show cracks, and inflation while still above target is softening.

DXY H4 Chart 

Markets have begun to flirt with the idea that the Fed might not need to hold rates high into late 2025. While no immediate rate cuts are expected, the narrative of "higher for longer" is losing momentum. That doesn’t mean the dollar is about to fall off a cliff, but the conditions that supported its strength over the past year are eroding.

The greenback remains supported by global uncertainty and the lack of compelling alternatives. But if U.S. yields start to decline more meaningfully especially if rate cut pricing accelerates into the summer the dollar may find itself on the defensive for the first time in months.

EUR – Walking a Fine Line

The euro has been quietly climbing, not because of a booming eurozone economy, but because expectations for aggressive ECB easing have been dialled back. A June rate cut is still expected, but markets are no longer pricing a rapid series of follow-up cuts. Wage growth remains firm, and core inflation while easing isn't low enough to give the ECB full confidence to move quickly.

European growth remains fragile, with Germany and other key economies showing mixed signals. But in FX, relative expectations matter more than absolute outcomes. And as U.S. data softens, the euro may benefit simply by being "less dovish than feared."

EURUSD H1 Chart 

The risk, of course, is that if the Fed stays on hold and the ECB does cut multiple times, the rate differential could reassert itself. But for now, EUR/USD is holding firm, and the bias is slowly shifting higher especially if U.S. exceptionalism continues to fade.

JPY – Undervalued, Under Siege

The Japanese yen is trading at historically weak levels, even after a modest tightening by the Bank of Japan. The problem? Yield differentials still matter hugely. And with U.S. 10-year Treasuries hovering near 4.5%, the yen continues to suffer.

Authorities in Tokyo have intervened verbally and may have stepped in physically. But history shows that intervention without policy coordination rarely works for long. The yen is cheap by any valuation metric, but it won’t sustainably strengthen until U.S. yields drop or the BoJ tightens further neither of which looks imminent.

Still, the setup is compelling. When the tide turns likely due to a shift in the Fed's stance the JPY could rally sharply. For now, though, it's a waiting game.

USDJPY H1 Chart 

AUD – Caught Between Two Worlds

The Australian dollar is struggling to find direction. On one hand, the RBA has kept a hawkish tone, refusing to rule out further rate hikes. On the other hand, domestic data shows consumers under pressure, housing activity cooling, and inflation gradually easing. Markets are increasingly pricing in rate cuts for later this year.

Externally, the AUD remains highly sensitive to China. And with Chinese data showing a patchy recovery at best, investor sentiment toward the Aussie remains lukewarm. This leaves the currency in a tug-of-war: domestic policy uncertainty versus external fragility.

The good news? Positioning is extremely light, and any surprise whether a stronger CPI print or a China stimulus boost could trigger a meaningful short squeeze. But until that comes, the Aussie will likely remain range bound.

CAD – Quiet, Drifting

The Canadian dollar continues to trade in the shadows of the U.S. economy and oil prices. Domestic growth has disappointed, and inflation while still above target has cooled enough to justify the Bank of Canada’s dovish tone. Markets expect the BoC to cut rates this year, possibly even before the Fed.

That divergence keeps the Loonie on the back foot, even as oil prices remain elevated. Without a clear catalyst, USD/CAD has been drifting sideways, trapped between U.S. dollar strength and modest domestic weakness.

There’s potential for volatility ahead, especially if U.S. growth weakens faster than expected or oil spikes. But for now, the CAD lacks a distinct identity in the FX landscape.

The Bigger Picture – Narrative in Transition

Across the board, the FX market is moving from a world of policy conviction to one of policy flexibility. The era of aggressive tightening is behind us. Central banks are no longer solely fighting inflation they’re managing expectations.

This shift introduces more volatility and more nuance. Markets will become increasingly reactive to second-tier data and central bank messaging, with themes like wage growth, consumer resilience, and geopolitics playing a larger role in price action.

It also means that relative surprise rather than absolute strength will drive the next big FX moves. The dollar doesn’t need to collapse for the euro to rise. The yen doesn’t need more BoJ hikes to rally just a dip in U.S. yields. In this environment, timing and positioning matter more than ever.

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