ING strategists Francesco Pesole, Frantisek Taborsky, and Chris Turner report that the US Dollar's recent rally appears overextended, with several technical indicators signaling that the currency is overvalued against most G10 peers. Their short-term valuation model indicates the USD is 1.1% overvalued versus G10 currencies on an equally weighted basis, with the exception of GBP, where it is at fair value [1]. Despite these overbought signals, the strategists argue that an imminent reversal in the dollar's momentum is unlikely due to the absence of a clear macro or market catalyst. They note that sticky Federal Reserve tightening expectations and ongoing weakness in global bond markets continue to support demand for the dollar as a liquid, defensive currency [1].
The start of the week saw further dollar strength, bolstered by firmer oil prices following increased military activity in the Gulf. However, the day's economic calendar, featuring the NFIB survey and home sales figures, is not expected to have a significant impact on the currency's trajectory [1]. ING points out that in March 2025, it took a significant 'Sell-America shock' to derail an overbought USD, suggesting that a similar catalyst would be required for a reversal now [1].
Looking ahead, ING highlights the upcoming US midterm elections as a potential, though currently underappreciated, risk for the dollar. They note that markets have largely priced in the possibility of Republicans losing control of Congress, and any precautionary, potentially USD-negative positioning may not emerge until late October [1].
CONCLUSION
While the US Dollar shows signs of being overbought, ING strategists see no immediate catalyst for a reversal, with Fed policy expectations and global bond market weakness continuing to support the currency. Market participants may look to the US midterms later in the year for potential shifts in sentiment, but for now, the dollar's momentum appears intact.