USD on course to snap 8 week losing streak
USD was on a tear to the upside today, with DXY now on course to snap an 8-week losing streak, its longest losing streak in more than a decade. The dollar index opened the week around 93.10 and currently trades in the 93.30s. It’s been a choppy week for USD to say the least, after all, on Tuesday DXY set fresh multi-year lows of 92.13.
But towards the end of the week, as the sands have shifted, things have gradually started to perk up for USD and, as we spoke about last week, some of the key arguments for further USD downside continue to lessen…
Here are two key things that have fundamentally supported USD this week, and may continue to support it to the month’s end;
1) The FOMC – Not as dovish as markets want them to be
The turning point for USD this week was on Wednesday; traders appeared to aggressively pare their USD shorts (which CFTC data shows have been accumulated consistently over the course of the last few weeks) prior to the release of the FOMC minutes.
A good choice it was – the FOMC Minutes greatly disappointed markets, who wanted to hear that the FOMC had been discussing dovish policies such as average inflation targeting or yield curve control. Neither of these policies were discussed, with FOMC members even pushing back against yield curve control sending USD shooting higher (and triggered a sell off in the US stock market).
Rather, FOMC members seemed more focussed on potential tweaks to the statement to give greater clarity over their forward guidance.
Next week, Fed Chair Jerome Powell will speak at the Jackson Hole event, where he is expected to formally outline this tweak to the statement, which will indicate a new Fed policy of allowing inflation to “run hot” for a time before monetary conditions are tightened.
But this may not be enough for markets, as indicated by the reaction to the minutes. If the FOMC disappoints again, prepare for fresh USD upside.
2) Excessive Eurozone optimism
Events today dealt a severe blow to one of the key narratives driving USD weakness so fiercely since the EU Recovery Fund was agreed upon back in June; that EU economic growth prospects are significantly better than in the US.
This argument made sense back in June and July – at the time, US Covid-19 cases were rapidly increasing and the rate at which the US economy had been recovering from lockdowns had appeared to slow. Meanwhile, in the EU, data was coming in better than expected and the virus was under control.
However, the tables appear to be turning; European Covid-19 cases are on the rise whilst US cases have been stabilising for some weeks now. This is something that the ECB have already noted as a risk, so if the pandemic continues to worsen again on the continent, could be see a dovish shift at the ECB?
Moreover, it’s the US data that has been beating expectations while EU data has disappointed; case in, this morning’s EU PMI data for August was a disappointment, while US August PMIs were much better than expected, sending USD shooting higher and EURUSD lower by roughly 100 pips.
All of this latest evidence points to the fact that optimism over EU growth prospects relative to the US might be wildly optimistic (based on where EURUSD is currently trading).
These two factors, combined with an increasingly bullish technical viewpoint (USD is set form a hammer candle stick on the weekly, a sign of reversal), mean that looking forward, the USD might again have something to cheer about.
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