The Dollar Is Ready to Get Weaker

The U.S. Dollar index (DXY) has risen by 0.3% to 104.34 points, while the EURUSD has declined by 0.2% to 1.08320, slightly recovering from a dip to 1.08020 on Monday. Mixed economic data from the United States has not provided solid support for the Greenback. The Federal Reserve’s preferred inflation gauge fell to 2.5% YoY as expected, but the Core PCE, which excludes food and energy prices, remained at 2.6% YoY, missing the expected 2.5%. A higher-than-expected Q2 GDP was offset by contraction in the latest Manufacturing PMI readings. Despite this, the Dollar has strengthened, with the EURUSD closing last week at 1.08570 and now hovering within a 1.08200-1.08500 trading range, near a strong support level. Large investors have been pushing retail investors out of their long positions, moving the EURUSD below recent consolidation lows and touching 1.08020 on Monday.

Market attention is focused on the Federal Reserve (Fed) for potential signals of interest rate cuts in September. Further cooling of the U.S. labor market in July could provide more reasons for the Dollar to weaken. Investor sentiment remains negative, with the WisdomTree Bloomberg US Dollar Bullish Fund (USDU) reporting net outflows of $4.0 million, following a $60.4 million outflow the previous week, the largest since June 2023. U.S. 10-year Treasury yields fell to 4.18% from 4.24% at the beginning of last week, and bets on a Fed rate cut in September have peaked at 100.0%, according to the CME FedWatch Tool.

Although there may be another wave of elevated volatility around the 1.08000 level as efforts to push retail investors out of their long positions continue, the chances for the EURUSD to climb towards 1.10000-1.11000 in the mid-term are now much higher.