Market update: US dollar on breakdown watch after Fed pivot, setups on EUR/USD, USD/JPY, GBP/USD

The US dollar, as measured by the DXY index, was a touch softer on Tuesday, down about 0.35% to 102.13, undermined by the pullback in treasury yields, which has continued this week following the Federal Reserve's pivot last Wednesday.

For context, the Fed took a more optimistic view of the inflation outlook at the conclusion of its December monetary policy meeting, admitting that discussions of cutting rates have begun, and signaling that it will deliver 75 basis points of easing in the coming year, a big shift from its previous stance.

With traders increasingly confident that the US central bank will prioritize economic growth over price stability and will slash borrowing costs numerous times in 2024, bond yields are likely to head lower in the near term, creating a hostile environment for the greenback.

Positive sentiment and market exuberance triggered by the FOMC’s dovish posture will also act as a headwind for the greenback, boosting riskier and high-beta currencies for the time being. Against this backdrop, we could see new lows for the DXY index before the end of 2023.

EUR/USD technical analysis

EUR/USD extended its advance and rose for the second straight day on Tuesday, pushing closer toward cluster resistance stretching from 1.1000 to 1.1015. Breaching this barrier may prove challenging for bulls, but a breakout could pave the way for a rally towards the 1.1100 handle.

Conversely, if bullish momentum fades and prices turn lower, the 200-day SMA near 1.0830 will be the first line of defense against a bearish assault. The pair is likely to establish a base in this region before staging a comeback, but if a breakdown occurs, a drop toward trendline support at 1.0770 could ensue.

EUR/USD daily chart

USD/JPY technical analysis

USD/JPY bucked the broader trend and rallied strongly, soaring more than 1% at one point after the Bank of Japan maintained its ultra-accommodative stance, indicating that it will be difficult to exit negative rates and that uncertainty about the outlook is extremely high. Despite this solid advance, the pair failed to push past resistance at 144.75, with sellers staunchly defending this barrier, as seen in the daily chart below.

Looking ahead, it is crucial to monitor price behavior around the 144.75 level, bearing in mind that a breakout could open the door for a move towards 146.00, followed by 147.30. Conversely, a firm rejection from 144.75 may trigger a retracement towards the 200-day simple moving average. On continued weakness, a retest of the December swing lows should not be dismissed.

USD/JPY daily chart

GBP/USD technical analysis

GBP/USD accelerated higher on Tuesday, breaching a key Fibonacci level at 1.2720 and pushing towards trendline resistance at 1.2780. This technical barrier must hold at all costs, failure to do so could propel prices above the 1.2800 handle. Should strength persist, the bulls may set their sights on the psychological 1.3000 threshold.

On the other hand, if sellers regain the upper hand and spark a bearish reversal, dynamic support is located at 1.2590, which corresponds to a short-term rising trendline extended off the November lows. This trendline should provide stability on a pullback, but in the event of a breakdown, a decline toward the 200-day simple moving average would emerge as the baseline scenario.

GBP/USD daily chart

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