The dollar experienced a decline in trading, losing many of its Monday gains, despite a rise in equities and higher Treasury yields. This shift in focus towards the deficit and tax cuts offered a temporary respite from trade concerns. The US CPI report was cooler than anticipated, but tariffs’ effects are yet to show. Consequently, the dollar faced modest losses, and traders watched technical levels closely.

EUR/USD edged towards 1.1200, challenging the 100-hour moving average at 1.1197. An upward break could shift bias to neutral, while holding below may maintain a bearish outlook. USD/JPY also showed sluggish movement, testing levels below 147.00 with its 100-hour moving average at 146.45 in focus. Rising yields add complexity to this scenario as the dollar struggles.

Broad Shift In Currency Trading

GBP/USD regained its early-week losses, moving above 1.3300, and AUD/USD increased to 0.6475. The Australian dollar faces another potential test at 0.6500, which might trigger further gains later in the week. These movements reflect a broader shift in currency trading as the week progresses.

The dollar’s faded momentum marked a shift in what had been a relatively straightforward story earlier in the week. While Monday had brought gains on the back of rising yields and firm equity performance, those same supporting factors haven’t been enough to maintain dollar strength. Now, attention has started to drift towards the growing fiscal deficit in the United States and ongoing debates over tax policy—subjects that don’t always impact foreign exchange directly, but at times like these, they become more pressing. These discussions cut through the usual economic releases and instead suggest longer-term concerns that can rattle confidence in a currency.

What’s already happened shows a market that’s not entirely convinced by the dollar’s previous rally. Inflation data in the form of the US CPI came in softer than expected, reinforcing the view that any aggressive policy tightening may now be on hold. However, a full change in direction in rates is not yet on the cards. Traders shouldn’t dismiss the lagging impact of tariffs either—that’s a narrative that might resurface with more weight in the data in coming months.

Against the euro, we saw price action nudge towards 1.1200, brushing straight up against the 100-hour average. A breach above would suggest that pressure has reversed, making the recent downtrend look overstretched. If sellers continue to hold it below, however, it confirms that resistance is still active. In this pairing, movements are not wide, but they can escalate quickly if a level gives way.

The yen continues to find tentative strength, even as yields in the US climb. Pressure on USD/JPY around the 146.50 area—likely a technical magnet in the short term—tells us that rising rates aren’t enough to push the dollar through nearby resistance on their own. That disconnect puts us in uncertain territory where regular correlations aren’t providing clear signals. Jumps in bond yields used to mean automatic gains in this pair; that’s no longer a given.

Shifting Rate Expectations

For sterling, regaining 1.3300 has undone some of the week’s earlier shake-out. That’s a level that had previously acted as a cap, and now offers a launching point for larger moves. If the pair remains above, it heightens the case for a repositioning in favour of the pound. The run higher may be partly reflective of broader dollar slippage, but it’s also helped by shifting rate expectations at home, which are far from settled.

As for the Australian dollar, its rise towards 0.6500 puts it near a level with a track record of rejecting further upside. A weekly close above could force a fresh look at positioning. We often see this pair behave more forcefully when it tests round numbers like this, especially in thinner sessions. There’s also a tendency for it to react sharply to moves in equities, so that correlation will carry added weight over the coming sessions.

From here, the game becomes less about interpreting major economic releases and more about responding rapidly to adjustments in risk pricing, especially where positioning has become crowded. With technical levels being tested across the board, there is little appetite to hold on tightly to winning trades that look stretched once momentum slows. Instead, entries must be disciplined, and exits should be tighter. Holding through event risk will carry more downside, especially with a dollar that’s no longer behaving in line with rising yields.

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