When USD breaks out, where does the capital flow to? The race between stability and yields

In the first week of January, EUR/USD plummeted to 1.1690, marking one of the most intense trading sessions for the Euro. On the surface, this is just a typical exchange rate movement, but deeper down, it results from a complex interaction between interest rates, monetary policy, and global investor sentiment.

USD dominance: Three forces converging to create the “Green Wave”

To understand why the USD has become the preferred “safe haven,” we need to look at the three main factors interacting with each other.

First is optimistic expectations about US employment data. Before each major economic data release, the market usually anticipates and positions itself accordingly. Currently, the consensus is that the US economy remains stable, prompting traders to rush into USD as a “bet” on resilience. This effect is called “buying on expectations,” providing automatic upward pressure on the USD even before official data is released.

Second is the possibility that high interest rates could persist. Contrary to earlier predictions, the chance of the Fed cutting rates in March has now dropped to 45%. This means monetary policy will stay tight longer. The high interest rate environment automatically boosts the relative yields of USD-denominated assets, attracting international capital. Money cannot resist “taking the USD yield cost,” thus continuously holding onto the greenback.

Third is the demand for safe havens amid geopolitical uncertainty. As global geopolitical risks increase and investors feel uneasy, they naturally turn to USD as a “secure refuge.” This adds a psychological support layer for the US dollar.

However, analysts warn that most of this strength reflects “priced-in expectations” rather than actual developments. Once real data diverges from expectations or policy signals change, the trend could reverse rapidly.

“Good news = Market shock”: An unexpectedly simple but unpredictable reason

One of the most counterintuitive phenomena in trading is: good news often causes prices to fall, while bad news tends to push prices up. This contradiction is not illogical but reflects the “buy on expectations, sell on reality” mechanism.

When US employment data is about to be released, traders first predict a “moderately good” outcome and buy USD accordingly. But when the actual figures are announced, even if they are “good,” the market tends to “take profits”—selling what was just bought—causing prices to reverse downward. That’s why sometimes “good news turns negative.”

Currently, the focus is no longer just on a meeting or a specific number, but on whether monetary policy next year will undergo significant structural changes. Some analysts suggest that if political pressures increase, the Fed might be forced to adopt unconventional measures—such as aggressive rate cuts—even if the economy is still growing. Although this contradicts traditional macro logic, it is feasible if inflation cools rapidly or the financial system faces pressure.

More concerning is if political interference in the decisions of the Central Bank becomes a precedent, as recent debates about Fed members suggest, then fears over policy independence will surge. This would raise the “risk premium” demanded by investors, further suppressing other currencies relative to the USD.

In such scenarios, capital tends to “hide first, verify later.” In other words, before the truth is clearly revealed, investors are willing to hold stable assets like USD to observe. However, analysts warn that this support is usually temporary; once the situation clarifies, capital can shift very quickly to other channels.

Euro under double pressure: External and internal

Compared to the USD, EUR movements appear much weaker. Not only is it passively depreciating due to the USD’s strength, but the Euro’s economic fundamentals and policy outlook are also creating pressure.

From inflation: The Eurozone’s deflation process is happening faster than expected. Specifically, Germany’s December CPI dropped from 2.6% to 2%, a significant decline. As inflation falls, markets start “guessing” whether the ECB will loosen policy earlier than planned. Expectations of rate cuts increase, automatically reducing the attractiveness of Euro-denominated assets and triggering capital outflows.

From fiscal concerns: Worries about the sustainability of the Eurozone’s financial stability are also rising. German Chancellor Friedrich Merz publicly warned that many key sectors are in critical positions, and the government has taken nearly a year without sufficient response. France’s Finance Minister warned that if the parliament fails to reach a budget agreement, the deficit could rise to 5.4%, with a risk of credit rating downgrade. These signals cause traders to demand higher risk premiums, continuing to suppress EUR.

Technically, EUR/USD has been rejected at 1.1807 and then declined again, indicating strong selling pressure at higher levels. The 1.1750 zone has become a “battlefield” between buyers and sellers. If it cannot break through and hold this level, upcoming recoveries will likely be minor corrections rather than trend reversals. Conversely, the recent test of 1.1658 shows it still acts as a support level. The exchange rate remains above this, but the margin is narrow; if market volatility spikes, technical selling at this level could be triggered.

The MACD indicator shows short-term momentum weakening, with DIFF at 0.0019 and DEA at 0.0031, and the MACD histogram at -0.0025. RSI hovers around 47.0851—neutral but slightly weak—indicating room for further decline and that the market has not yet entered oversold territory.

Gold consolidates but retains “momentum”: Why gold prices fall but long-term support remains

The USD’s strength not only pressures the Euro but also pulls gold prices back. This is the classic “currency valuation” effect—when USD rises and real interest rate expectations increase, gold, priced in USD, naturally faces downward pressure.

However, the long-term outlook for gold has not disappeared. Amid a deeply divided global order, many central banks are quietly adjusting their reserves, increasing holdings of precious assets like (gold). This long-term rebalancing creates inherent demand, supporting gold after correction phases. Therefore, the reason for gold’s price decline is mainly short-term rhythm, not a fundamental trend change.

Next steps: The EUR/USD battlefield will be hard to predict

Overall, EUR/USD in the near future is unlikely to move in a single direction but will fluctuate within a short cycle. The trend mainly depends on the gap between upcoming actual data and market expectations.

USD bullish scenario: If US employment data remains strong and expectations of Fed rate cuts in March stay below 50%, the USD will maintain its strength. In this case, EUR/USD could test the 1.1658 level or lower.

EUR recovery scenario: Conversely, if employment data is weaker than forecast or signs of easing monetary policy emerge, EUR/USD could recover toward the 1.1750 zone.

In the medium term, the fate of the Euro will be determined by two factors:

• Will the ECB start easing policy earlier due to rapid deflation?
• Can the EU stabilize fiscal and growth conditions to restore confidence?

For the USD, the key questions are: “How long can high interest rates be maintained?” and “Will the policy framework change?”

The interaction between these two sides is likely to cause EUR/USD to fluctuate within the range of 1.1658 to 1.1750, awaiting a strong catalyst to break this equilibrium.