The dollar index seems to be losing upside traction in a technical correction

The euro plunged to fresh mid-2020 lows around 1.1525 on Tuesday amid a combination of a strong dollar and risk aversion that prevailed in the global financial markets. Today, EURUSD managed to stage a local bounce and climbed back to the 1.1550 area as the greenback eased across the board.

It looks like traders take profit ahead of the key events of the week – the US inflation data and FOMC meeting minutes due later today will likely set further direction globally. For now, stocks see mixed trading as investors are getting more cautious at this stage.

After rallying to fresh 2021 highs above 94.50 against the backdrop of positive news from the debt-ceiling, the USD index seems to be losing upside traction in a technical correction amid overbought conditions as well as due to the retracement in US yields.

However, the upside potential surrounding the common currency looks limited, with bearish risks persisting as the greenback remains underpinned by expectations for a soon start of the tapering process by the Federal Reserve. The prevailing risk-off tone in the global financial markets adds to the persisting bullish trend in the safe-haven dollar.

Furthermore, EURUSD could come under renewed selling pressure later today if US inflation data exceeds expectations and the Fed confirms its intention to start reducing asset purchases in November.

In this scenario, the euro may slip to fresh long-term lows and even threaten the 1.1500 psychological figure should the dollar stage another rally following the events. On the upside, the pair needs to make a decisive break above the 1.1580 intermediate resistance in order to regain the 1.1600 figure, followed by the descending 20-DMA, today at 1.1640.


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