Currency Market Déjà vu. The Dollar Is Strengthening

The U.S. Dollar Index (DXY) has risen by 0.40% to 101.60, with the EURUSD slipping by 0.4% to 1.10370. This pattern resembles the situation from last week, when a slew of U.S. macroeconomic data, including Manufacturing PMI, JOLTs, ADP Nonfarm Payrolls, and Services PMI, triggered similar market moves. The release of those reports contributed to a brief rise in the EURUSD to 1.11100, but a disappointing U.S. labor market report for August reversed that trend, sending the Dollar down by 1.0%.

August Nonfarm Payrolls data missed expectations, coming in at 142,000 versus the forecasted 164,000, along with downward revisions for June and July totaling 86,000 jobs. This followed a massive revision of 818,000 jobs for April 2023 through March 2024, intensifying recession concerns. Despite these signals of a weaker labor market, some investors sought safety in Dollar-denominated assets, pushing the EURUSD back to 1.10260 on Monday, with further declines to 1.10230.

However, unlike last week, large investors seem less inclined to bet on a near-term EURUSD bounce. The WisdomTree Bloomberg US Dollar Bullish Fund (USDU) recorded a sharp slowdown in net inflows, signaling neutral sentiment. This suggests that investors are leaning toward a stronger U.S. Dollar, anticipating a further drop in EURUSD.

Chances for a breakthrough below the 1.10000 support are increasing, as firms like Morgan Stanley predict the Euro could fall by 7.0% to 1.02000 in the coming months. This is based on expectations that the European Central Bank (ECB) might cut interest rates faster than expected, weakening the Euro. The ECB is widely expected to announce another rate cut of 0.25 percentage points on September 12.

The key risk for this outlook lies in U.S. inflation. August inflation is expected to slow to 2.6% YoY from 2.9% YoY, which could give the EURUSD some support and make breaking the 1.10000 level more difficult. The upcoming Federal Reserve meeting next week will likely set a clearer direction for the Dollar's trajectory.