Dollar recovery gains traction as EUR/USD stalls near 1.15

The dollar is showing early signs of recovery as EUR/USD stalls near 1.1500, with Treasury yields climbing and suspected Japanese intervention dominating FX markets. EUR/USD slipped to around 1.1504 on Monday after opening near 1.1548, leaving the pair at the bottom of its intraday range.

Bank of America said the July Federal Reserve press conference "injected uncertainty around the Fed's inflation-fighting commitment and reaction function," describing the meeting as dovish and confused. Chair Kevin Warsh suggested financial markets had already delivered some of the tightening that might otherwise have required higher rates, a stance BofA called "not reassuring."

The dollar's decline accelerated after US core PCE inflation rose only 0.1% in June and second-quarter growth undershot expectations. Suspected Japanese intervention against the yen triggered a sharp fall in USD/JPY below 158, spilling over into broader dollar sentiment. EUR/USD ended July around 1.1530, having recovered from a monthly low near 1.1354, and remains 1.7% lower for 2026 with the year's range spanning 1.1325 to 1.2075.

The stakes are significant for global markets. Bank of America forecasts EUR/USD at 1.12 in September, 1.15 at year-end, and 1.20 by the end of 2027, with three 25-basis-point Fed hikes expected over the remaining 2026 meetings. ING sees buyers emerging around 1.1500 but views 1.1600 as a difficult test for the recovery.

Fed credibility gap shifts dollar risk balance

BofA said the dollar should respond differently to "a central bank credibly doing the tightening" than one which "outsources the tightening to the market." That credibility concern has shifted the near-term risk balance against the dollar, though the bank still sees support from resilient US economic conditions, artificial-intelligence investment, and geopolitical uncertainty.

"Ironically, we think the need to re-establish credibility increases the probability that the Fed will hike in September," BofA said. Its economists continue to forecast three 25-basis-point increases over the remaining meetings of 2026.

Positioning and intervention complicate the outlook

ING estimates that speculative long-dollar exposure against other major currencies was at its most stretched since January 2025, while leveraged funds held their largest EUR/USD short positions since 2021. According to the bank, "there may still be room for further USD long-squeezing," making it too early to call a firm bottom in the dollar selloff.

ING analysts note EUR/USD broke through 1.1500 "with little resistance" and expect the level to attract buyers for a while longer. The bank sees near-term risks tilted toward further euro gains, although it is cautious about chasing a sustained move above 1.1600. Such a break would probably require another material repricing lower in US rates, together with an easing in Middle East tensions.

On the technical side, EUR/USD's recovery has improved after the late-July surge, but 1.1500 remains the immediate test. A sustained hold above it would keep 1.1555 and 1.1600 in view, while a renewed break lower would expose 1.1450 and the 1.1370 area.

The dollar's trajectory in the coming weeks will hinge on whether the Fed follows through on its inflation-fighting rhetoric with actual rate increases, and whether Japanese authorities continue to intervene in the yen market. For now, the FX market remains caught between a Fed seeking to rebuild credibility and a dollar that has already priced in significant tightening.

This article is for informational purposes only and does not constitute investment advice.