Will the USD keep going up against the euro and yen?

After weeks of relentless pressure, the US dollar is showing signs of life - just as its two major rivals, the euro and the yen, gain momentum from diverging economic signals. While safe-haven flows and hawkish whispers from the Bank of Japan have strengthened the yen, the euro’s fortunes are tethered to mixed PMI data and cautious optimism from ECB policymakers. 

With markets now weighing rate cuts from the Fed against potential tightening abroad, a critical question emerges: is the dollar merely pausing on its way down, or is this the beginning of a broader comeback?

Euro holds firm as US data misses the mark

The euro has been capitalising on the dollar’s stumbles, with EUR/USD breaking above 1.1300 before pulling back to around 1.1270. This move came off the back of softer-than-expected US data and fresh optimism in the eurozone, even as its own PMI figures fell short.

In the US, the latest S&P Global PMIs came in above expectations, with manufacturing and services both printing at 52.3 - a solid sign of resilience. 

However, that wasn’t enough to fully restore confidence in the dollar. Market nerves were already frayed by concerns over Trump’s freshly approved tax bill, which, according to the CBO, could add $3.8 trillion to the national debt over the next decade.

Across the pond, eurozone PMIs disappointed, particularly in the services sector, which dropped below 50 - a sign of contraction. 

Even so, euro bulls found some comfort in the German IFO business climate improving slightly and ECB officials maintaining a cautiously constructive tone. Vice-President Luis De Guindos noted inflation might return to the 2% target soon, while others hinted that rate cuts remain on the table - but only if justified by the data.

In short, the euro isn’t exactly powering ahead - it’s more a case of the dollar struggling to stay upright.

Yen revival fuelled by safe-haven currency flows and BOJ shifts

The yen, on the other hand, is gaining strength for reasons that go beyond simple dollar weakness. With equity markets wobbling and geopolitical tensions rising, demand for safe-haven assets like the yen has picked up. Throw in renewed tariff fears and the lingering fog over the US economy, and it’s clear why investors are hedging into the Japanese currency.

But here’s the real kicker: the Bank of Japan, long known for its ultra-loose monetary stance, is now showing signs of change. Under the leadership of Kazuo Ueda, Japanese bond yields have surged. The 30-year yield hit a 25-year high at around 3.2%, while the 40-year yield is now above 3.5%, the highest since the instrument’s inception in 2007.

This has drastically narrowed the yield differential between US and Japanese debt, making the dollar less appealing. Combine that with a cooling US inflation outlook and speculation that the Fed could cut rates twice by year-end, and the yen is suddenly looking like the smarter long-term hold.

To make things worse for the dollar, the yen carry trade, a long-time favourite for traders borrowing cheaply in yen to invest elsewhere, is starting to unwind. That spells further trouble for USD/JPY, which has already dropped around 1.09% this week.

Dollar index technical outlook: A bounce or a blip?

Despite all this, the dollar isn’t going quietly. On Thursday, USD/JPY snapped a three-day losing streak, rising over 0.20% late in the New York session, likely due to some profit-taking before the weekend rather than a shift in fundamentals. The pair found some footing around 143.96, having earlier dipped as low as 142.80.

Meanwhile, the US Dollar Index (DXY) clawed its way back above the psychological 100.00 level, buoyed by firm PMI readings and a slight dip in jobless claims, which came in at 227K, better than forecast.

But is this enough to call a bottom?

EURUSD forecast: Dollar at a make-or-break moment?

The dollar’s recent bounce could be the start of a comeback - but it’s far from guaranteed. The eurozone is still grappling with growth concerns, and the ECB remains split on future policy moves. Over in Japan, the BOJ may yet temper its hawkish shift if inflation cools or economic risks mount.

Still, the policy divergence between the Fed, ECB, and BOJ is shrinking - and that’s not great news for the greenback. If the Fed cuts rates while other central banks hold firm or tighten, the dollar could remain under pressure well into the second half of the year.

For now, we’re in limbo. The dollar may have hit a short-term floor, but whether it can build a recovery from here depends on the next few data prints and how the central bank chessboard plays out. The EURUSD pair is showing some upward pressure, with the bullish narrative supported by volume bars showing weak sell volumes. Should we see an uptick, prices could encounter resistance walls at the $1.14271 and $1.15201 price levels. If we see a slump, prices could find support floors at the $1.10947 and $1.04114 price levels. 

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