Dollar Strengthening Might Be Out of Fuel

The U.S. Dollar index (DXY) is down 0.15% to 102.39 points, while the EURUSD has risen 0.25% to 1.09900 this week. Though this dip in the Dollar may appear minor after last week’s 1.75% surge, it suggests a potential shift in market sentiment, at least in the short term.

The Greenback had been bolstered by Federal Reserve Chair Jerome Powell’s remarks on 30th September, where he signaled support for continued monetary tightening and highlighted the strength of the U.S. economy. Powell’s hints of robust incoming data were validated by strong reports, including JOLTs job openings, Nonfarm Payrolls, and a positive non-manufacturing PMI. In September, the U.S. economy added 254,000 jobs, far exceeding the consensus of 147,000, and the unemployment rate dipped to 4.1% versus the expected flat reading of 4.2%.

Despite these developments, investor sentiment towards the Dollar seems to have shifted. The WisdomTree Bloomberg US Dollar Bullish Fund (USDU) recorded net outflows of $14.6 million last week, erasing the previous $39.9 million bet on a stronger Dollar from six weeks ago, leaving a negative balance of $3.9 million. Large investors now appear less confident in the Greenback, and this could propel the EURUSD above the 1.10000 mark, with potential upside to 1.10500-1.10900.

The Dollar's weakness may further be driven by the release of the FOMC minutes, which could reveal concerns about a “deteriorating” U.S. economy. Coupled with slowing inflation, these factors could pressure the Dollar, pushing the EURUSD higher towards 1.11000. As a result, the currency market is likely to trade sideways in the run-up to the U.S. presidential elections.