Too soon to call USD lower
Those following the US Dollar’s performance in the markets would have noted a recent downturn accelerating as this week has progressed. There have been two factors driving this sell-off but it is far from certain that either may endure long enough to push the Dollar index back to its April lows. An underlying factor that put the Dollar on the back foot entering this week was a more positive risk sentiment. As we covered yesterday in the context of oil prices, a perceived drop in geopolitical risk is creating a risk-on sentiment in markets. Such an environment, even in the context of strong US growth, will be Dollar negative.
With this negative bias injected into the Dollar, when underwhelming PMI data was published on Tuesday, the Dollar was able to accelerate its retreat. In absolute terms, the PMIs were a disaster: the manufacturing index moved into contractionary (sub-50) territory and the composite index recorded significantly lower than both consensus and prior readings. When compared to the Euro area, perhaps more concerningly we reveal that for the first time in 12 months the comparable Eurozone index stands above that of the US when considering both services and manufacturing data combined. So, in light of these two downward pressures, is that it for this latest run of Dollar strength?
Don’t count on it. Firstly, it was the S&P index that was observed this week. Whilst almost identical in their methodology, it is the ISM index that generally carries more weight in US markets. Secondly, whilst soft data is important, it will be eclipsed by the plethora of hard data we see published today and tomorrow within the US. If we get a surprise reading in either GDP or inflation data, you can bet that no one will be looking back at the S&P survey data for clues on the Dollar’s path. If that’s not enough to convince you that the Dollar story has not yet been written, the next Fed decision is now less than a week away.
Discussion and Analysis by Charles Porter
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