Market update: US dollar stalls amid mixed treasury yields, eyes on core PCE data

The US dollar was largely flat on Tuesday, moving between small gains and losses, but displaying limited volatility in a context of mixed US Treasury yields. Traders appeared to exercise caution, and many remained on the sidelines ahead of a high-impact market event on Thursday: the release of the core PCE deflator, the Federal Reserve’s preferred inflation gauge.

January's core PCE is seen rising 0.4% compared to December, bringing the annual reading down from 2.9% to 2.8%. While the small directional improvement in the annual rate would be welcome, it is crucial to note that the CPI and PPI figures for the same period were substantially higher than anticipated. This creates the risk of a similar surprise in the upcoming PCE report.

Another hot and sticky inflation print could force the FOMC to postpone the start of its rate-cutting phase to the second half of the year, sending interest rate expectations higher. The likelihood of a delayed easing cycle or less aggressive cuts than initially envisioned should exert upward pressure on bond yields, leading to a stronger US dollar.

Diving into technicals: key levels for EUR/USD and GBP/USD ahead

EUR/USD technical analysis

EUR/USD edged lower on Tuesday but found stability above the 1.0835 area, where trendline support meets the 200-day moving average. Holding this technical zone is key for the bulls. A breakdown could trigger a pullback towards 1.0725, with 1.0700 being the next potential defense line.

On the flip side, if sentiment swings back in favor of buyers and prices resume their ascent, resistance emerges at 1.0890, near the 50-day simple moving average. Continued upside progress beyond this threshold could potentially fuel a rally towards 1.0950.

EUR/USD price action chart

GBP/USD technical analysis

GBP/USD rose modestly on Tuesday, consolidating above its 50-day simple moving average at 1.2680. If gains pick up pace over the coming sessions, trendline resistance at 1.2725 will be the first line of defense against a bullish attack. Above this ceiling, attention will turn to 1.2830.

In the scenario of sellers reasserting control and initiating a bearish reversal, support can be spotted at 1.2680 and 1.2600 thereafter. A deeper pullback beyond these levels could expose a short-term uptrend line and the 200-day simple moving average around 1.2580.

GBP/USD daily chart

^{This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.}