The Dollar May Fall Deeper

The U.S. Dollar Index (DXY) declined by 0.2% to 103.02 this week, while the EURUSD edged up by 0.1% to 1.09150. At first glance, the situation appears calm, but underlying factors suggest otherwise.

On August 5, volatility erupted, with some dubbing it a “black Monday.” Stocks dropped sharply, and the EURUSD surged by 0.9% to 1.10080, its highest level since January 2. This spike in volatility was triggered by the weak Nonfarm Payrolls report for July released last Friday, showing the American economy created only 114,000 new jobs versus the expected 176,000. The unemployment rate also increased to 4.3% from 4.1% in June. This rise in unemployment triggered the Sahm Rule recession indicator, which signals a recession when the three-month moving average of the national unemployment rate rises by 0.50 percentage points or more relative to its low during the previous 12 months. The recent jump in unemployment in the United States made this rule materialize.

However, American investors managed to cool down the market after the release of the Services PMI in the U.S., which rose to 54.5 points from 49.6 points. This helped to ease recession fears, leading to a rebound in stocks and a retreat in the EURUSD to 1.09050, the level where trading closed on Friday.

Despite this, the Greenback still has room to decline. The WisdomTree Bloomberg US Dollar Bullish Fund (USDU) reported net outflows of $60.4 million over the last two weeks, the highest since June 2023, indicating that large investors continue to bet on a weaker Dollar. The primary upside target for the EURUSD was met at 1.10000-1.11000, with an extreme upside target at 1.14000-1.15000, though this seems unrealistic at present. Nevertheless, if large investors continue to bet on a weaker Dollar, the EURUSD may continue to rise.

The U.S. debt market is signaling the same scenario, with U.S. 10-year benchmark debt yields dropping sharply to 3.78%. This is bad news for the American currency. However, if the decline continues sharply, it may signal increasing recession fears, which could elevate the demand for the Dollar as a safe-haven asset.

There is less uncertainty in the market now. The expected move towards 1.10000-1.11000 was achieved, and taking profits on Monday was a prudent decision. With no major data releases this week expected to trigger elevated volatility, if the stock market slows its decline and large investors continue to bet on a weaker Dollar, another jump in the EURUSD towards 1.11000 is possible.