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The US dollar (DXY) has been struggling to find traction, extending its losing streak despite strong positioning at the start of the year. Market sentiment had favoured further USD strength, but recent price action has disappointed dollar bulls. The greenback has now logged four weeks of losses out of the last five, reflecting an ongoing shift in market dynamics.
DXY H4
One key factor behind the dollar's weakness is the growing optimism surrounding geopolitical developments. A recent phone call between President Trump and Russian President Putin sparked hopes of a ceasefire in Ukraine, boosting the euro and other European currencies. If a lasting peace deal materializes and leads to a significant drop in European energy costs, it could provide further upside for the EUR. However, scepticism remains regarding how quickly major European economies would be willing to resume energy imports from Russia, keeping the outlook uncertain. So, for now long EUR is not a bad idea… but be careful!
Another factor pressuring the dollar is the perception that Trump’s trade policies may not be as immediately disruptive as feared. While the administration has announced plans for broad tariff increases—most notably a 25% tariff on steel and aluminum—these measures won’t take effect until March and April. Moreover, Trump’s proposed "reciprocal tariffs" remain under development, with uncertainties around their implementation. The final methodology will determine the extent of their impact, but the inclusion of non-tariff barriers (such as VAT rates, exchange rate policies, and subsidies) raises the risk of broader disruptions.
Despite these headwinds, there are reasons to believe the USD could regain strength. Yield spreads remain supportive of the dollar, as the Federal Reserve is still expected to keep rates higher for longer compared to other G10 central banks. The European Central Bank, Bank of England, and Bank of Canada have already initiated rate cuts, and both the Reserve Bank of Australia (RBA) and Reserve Bank of New Zealand (RBNZ) are expected to follow suit in the coming weeks. This policy divergence could eventually support a USD recovery.
Trade Ideas & Key Events
I’m maintaining my short EUR/JPY trade idea, as the narrowing yield differential between the ECB and the Bank of Japan should continue to weigh on the pair. The BoJ has signaled confidence in higher wage growth and inflation, paving the way for further rate hikes, while the ECB remains on an easing trajectory. The last time this rate spread narrowed to current levels, EUR/JPY traded between 140-150, suggesting further downside potential.
Looking ahead, key economic events include the RBA and RBNZ policy meetings. The RBA is widely expected to kick off its rate-cutting cycle with a 25bps reduction, while the RBNZ is set to deliver another aggressive 50bps cut. Meanwhile, UK labour market and inflation data will be closely watched as the BoE considers further easing measures, with expectations for another rate cut in May.
Market Dynamics & Outlook
- EUR/USD: Benefiting from geopolitical optimism but faces energy price risks.
- GBP/USD: BoE’s stance remains cautious despite recent economic resilience.
- USD/JPY: Yield spreads continue to support the dollar, limiting JPY gains.
- AUD/USD: Short-term weakness likely with RBA rate cuts, but long-term prospects remain mixed.
- NZD/USD: Further downside possible as the RBNZ accelerates rate cuts.
While the USD has softened recently, market sentiment could shift if geopolitical optimism fades or if the Fed pushes back on rate cut expectations. Trade policy uncertainty also remains a wildcard, with the potential for sudden risk-off moves. For now, a cautious approach is warranted, with opportunities to re-enter USD long positions at more attractive levels heading into Q2.
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