Dollar Rally Faces Pullback Risk, Credit Agricole Warns

The dollar hit its strongest level in over a year after the Federal Reserve's hawkish June meeting. Credit Agricole thinks the move has gone far enough. The French bank's strategists said in a note that much of the good news is already priced into the greenback.

EUR/USD slid to around 1.137 and GBP/USD to near 1.320 this month as investors piled into dollars. Those levels reflect a market that has fully absorbed the Fed's higher-for-longer rate path, the strategists wrote. The risk now is that the rally has run ahead of the fundamentals.

Positioning data backs that view. Speculative long dollar bets are stretched, leaving the currency exposed to a snapback if the next round of US data disappoints or the Fed's messaging softens. The strategists pointed to Friday's personal consumption expenditures (PCE) price index, the Fed's preferred inflation gauge, as a key test.

A PCE print that matches or undershoots expectations could trigger profit-taking on dollar longs, they said. That would offer some relief to the euro and sterling, both of which have been battered by the dollar's ascent.

For EUR/USD, the 1.1300 area is the next major support level. A break below would open a run toward 1.1200. On the upside, a recovery above 1.1450 would signal the selling pressure is easing. GBP/USD faces a similar setup. The pair is testing support near 1.3150, with a break lower targeting 1.3050. A dollar pullback could lift cable back toward 1.3300, though the Bank of England's own rate outlook will also factor in.

Credit Agricole's warning does not call for a sustained dollar reversal. The bank still expects the greenback to remain well-supported as long as the Fed stays on hold and the US economy outperforms peers. The positioning skew alone suggests the path of least resistance is shifting.

Friday's PCE report is due at 8:30 a.m. ET. Traders monitoring EUR/USD and GBP/USD will get the next directional signal from that release.