US ISM Services Release: Dollar's Downward Pressure Expected as Markets Positioned for a Rebound

The dollar entered a correction phase on Wednesday as market participants took advantage of the fact that major currencies paired with the dollar had been depreciating at a fairly high pace over the past few days and had either reached or briefly breached key levels where support was widely expected. For example, these levels were 1.05 for EURUSD, 150 for USDJPY, and 1.20 for GBPUSD. It is likely that an important technical catalyst also played a role in the dollar index (DXY) as the price reached the upper bound of the key ascending corridor:The fundamental background for the greenback hasn't changed significantly, and, if anything, it has favored further strengthening of the dollar and a rally in US bond yields. On Monday, the ISM report on U.S. manufacturing sector activity beat estimates; the headline reading was higher than expected but remained below 50 points (indicating that slack in the sector persists but downward momentum has slowed). However, the hiring component surprised significantly, reaching 51 points, indicating an acceleration in hiring within the manufacturing sector. This is indirectly supported by the weekly initial unemployment claims, which continue to move towards the minimum of the current business cycle (the latest print being 204K), effectively countering any rumors of the Federal Reserve softening its stance on the "higher for longer” policy that Fed officials have been discussing recently:Market upheaval unfolded yesterday in response to the release of JOLTS data on job openings, a critical indicator of labor market imbalances in the post-pandemic era, specifically highlighting labor shortages. To everyone's surprise, the count of job openings saw a significant and unexpected surge, following several months of continuous declines:Clearly, the labor market situation in the United States remains a significant driver of inflation, despite the Federal Reserve's efforts, which have deterred officials from adopting a more market-friendly stance.The strengthening of European currencies today, as well as those of countries dependent on energy resource imports, can be attributed in part to the decline in oil prices. Both benchmark indicators, WTI and Brent, experienced a 2% decrease today. From a technical analysis perspective, the possibility of further short-term declines is uncertain, as the price has reached the lower boundary of an upward channel, where there is a strong likelihood of a rebound:In the event of a rebound, one should anticipate renewed downward pressure on European currencies and the yen. Recently, markets have solidly connected the surge in energy prices with an increased risk of stagflation for oil-importing nations, primarily due to supply control by OPEC, rather than improved demand or prospects in importing countries.It appears that Japanese authorities had to intervene in the foreign exchange market yesterday when the USDJPY rate reached 150. The exchange rate briefly dropped to 147.20, but the decline was swiftly reversed. This potential intervention had a notable psychological impact on the market, underscoring that authorities in some countries can prevent substantial depreciation of their national currencies.Today, the release of the ISM report on the services sector's activity is on the agenda. In my view, the market has already factored in the prospects of a reacceleration of economic activity in the US. Therefore, a minor positive deviation from the forecast is unlikely to exert a significant influence on the market. Conversely, if the report disappoints, the significantly cheaper European currencies and the yen may experience an upward rebound, particularly if short-term speculative momentum comes into play, as is likely in this scenario. In such a scenario, the potential target for an upward correction in EURUSD is projected to be around 1.06, while for GBPUSD, it could reach approximately 1.215.