US Dollar: Overbought signals but no clear catalyst – ING

ING strategists Francesco Pesole, Frantisek Taborsky and Chris Turner note that several indicators show the Dollar rally is stretched, with the currency overvalued against most G10 peers and positioning extended. However, they argue that without a clear macro or market catalyst, an imminent reversal is unlikely, as sticky Fed tightening expectations and global bond weakness continue to support demand for the Dollar.

Extended rally lacks reversal trigger

"The start of the week has brought more dollar strength. Firmer oil prices, following increased military activity in the Gulf, have helped keep the dollar on solid footing. Today’s calendar is unlikely to be particularly impactful, with the NFIB survey and home sales figures the main highlights."

"That said, several technical indicators point to an increasingly stretched USD rally. Our short-term valuation model shows the dollar overvalued against every G10 currency except GBP, where it’s at fair value. On an equally weighted basis, USD is 1.1% overvalued versus G10."

"Is this enough to call for a reversal in dollar momentum? We do not think so. In March 2025, it took a Sell-America shock to derail an overbought USD."

"A clear macro or market catalyst is needed for a reversal, and we do not see one. Fed tightening expectations remain stickier than those for most other central banks, limiting USD downside even if oil prices retreat. At the same time, weakness across global bond markets continues to support demand for a liquid defensive currency."

"Further ahead, US midterms may represent a somewhat underappreciated USD risk. However, markets have long priced in the possibility of Republicans losing control of Congress, and any precautionary, potentially USD-negative positioning ahead of the vote may not emerge until late October anyway."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)