Fatigue is growing in the upward trend of EURUSD, which became rather apparent on Friday, when the release of PMI data provoked sustained sell-off in the pair. The index of activity in the EU non-manufacturing sector showed that almost “mechanical” post-lockdown recovery is losing steam and at best enters plateau.
In the analysis of PMI data, it may be helpful to focus on how deviation of actual reading from the forecast changed in time to see how it corresponds with the story of consumer spending impulse. For example, in the August report, we see that PMI reading in the services sector lagged far behind the forecast (50.1 points against the forecast of 54.5 points).
In May and June, it was the other way around – the actual values were significantly ahead of the forecasts. This dynamic suggests there is a rise and fading of some impulse (most likely in consumption), which is reflected in respective acceleration and subsequent slowdown in the services sector activity.
Sustained economic momentum in the EU in the first months after lockdown period mixed with less dovish (compared to the Fed) ECB served as a driver for euro advance for some time, but now this factor is gradually fading away.
On Monday, USD came under strong pressure on news that Trump is interested in accelerated approval of vaccines, including foreign-made ones. Such a move, undoubtedly, has a political motive, but this does not negate the fact that it may approach the date of vaccination in the US. However, exploring new lows in USD, in my opinion, will be possible if two conditions are met:
- US data will continue to point on sustained economic momentum
- The Fed will retain dovish tone or sound more bearish.
If we look closely at the conditions under which the dollar declined in June-July, we can notice that positive economic surprises (i.e. momentum) were combined with expectations of aggressive easing by the Fed. However, in August, the minutes of the Fed meeting in July showed that the central bank, if it continues easing, will be less aggressive than expected. On the data side, we started to see some signs of weakness in the US economic data. Therefore, in my opinion, it becomes much more difficult for USD to make its way to new lows, as the factor of declining real yield weakens. The Jackson Hole symposium, which will take place as an online conference on Thursday, at which Jeremy Powell will have to outline the updated guidelines of the Fed in shaping monetary policy, will clarify a lot in this sense.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.