Stronger US data questions bearish USD sentiment – MUFG

The US dollar has remained at stronger levels in the last hours following yesterday’s modest rebound from recent lows. The US Dollar Index (DXY) once again tested and failed to break below the bottom of the trading range between the 92.000 and 94.000 levels that has been in place since late July. US economy appears to be holding up better than in Europe, therefore, economists at MUFG Bank question the USD bearish sentiment across the market.

Key quotes

“The latest IMM report revealed that leveraged funds continue to hold short US dollar positions in anticipation of further weakness although it has struggled to regain downward momentum against the other major currencies in recent weeks despite the favourable US election outcome and positive vaccine news.”

“The main trigger for the US dollar short squeeze on Monday was the release of the stronger than expected US PMI surveys. The surveys signalled that the US economy appears to be holding up better than European economies heading into year-end. Third-wave COVID-19 disruption did not prevent US business confidence from continuing to improve in November. The composite PMI jumped higher by 1.6 points to 57.9 in November and in doing so reached its highest level since March 2015.”

“The release of the PMI surveys from Europe painted a more downbeat picture. The negative impact on business sentiment from the renewed restrictions on activity over the winter period was more evident. The eurozone composite PMI dropped sharply by 4.9 points to 45.1 in November. The weakness in the eurozone PMI surveys highlights that it would currently benefit more from a weaker currency than the US economy.” 

“The ECB will be hoping that their plan to ease monetary policy at their next meeting on December 10 will at least help to dampen euro strength and prevent EUR/USD from breaking to the upside out the current trading range between 1.1600 and 1.2000.”