Investors Are Waiting for Euro to Recover

The U.S. Dollar Index (DXY) is up 0.18% to 106.46 points, while EURUSD is rising, gaining 0.25% to 1.05560. The U.S. presidential election victory of Donald Trump halted EURUSD’s ascent at 1.09380, leading to a 1.0% decline last week to 1.07180. This downward trend extended with another 1.7% drop to 1.05270, driven by rising U.S. inflation and hawkish rhetoric from Federal Reserve (Fed) Chair Jerome Powell.

October’s headline inflation increased to 2.6% YoY from 2.4%, while producer prices surged to 2.4% YoY from 1.9%. Powell’s remarks reinforced the Fed’s reluctance to rush into rate cuts. U.S. 10-year Treasury yields jumped to 4.50%, their highest level since May. Despite these supportive factors for the Dollar, EURUSD managed to close neutral last Friday - a potential early indicator of Dollar weakness. This week, 10-year yields have begun to decline, dipping to 4.34%, although no major catalyst beyond oversold pressures currently supports a sustained EURUSD recovery.

Geopolitical tensions could bolster the Dollar. News that the U.S., U.K., and France have allowed Ukraine to use long-range ATACMS and cruise missiles against Russian territory has escalated tensions. In response, Russia revised its nuclear doctrine, authorizing nuclear retaliation if its territory is attacked by ballistic missiles like ATACMS. Gold prices, which fell 4.45% last week to $2560 per ounce, have surged 2.8% to $2631 on the heightened geopolitical risk.

Absent further developments in this geopolitical clash, macroeconomic data will likely steer market sentiment. Expectations suggest potential Dollar weakness, with inflation in the U.K. and Eurozone anticipated to rise in October. Additionally, November’s U.S. manufacturing and services PMIs are expected to indicate an economic slowdown, contrasting with neutral forecasts for the U.K. and Eurozone.

Large investors are adjusting their Dollar positions. Last week, a quarter of short bets against the Greenback were closed. The WisdomTree Bloomberg US Dollar Bullish Fund (USDU) reported $7.0 million in net inflows, offsetting a $6.3 million bet against the Dollar at 1.09000-1.09380. Should EURUSD continue its recovery, remaining short bets against the Greenback may also unwind.