The Dollar is Returning to a Long-Term Upside Scenario

The U.S. Dollar is weakening since the beginning of the week. The U.S. Dollar index (DXY) lost 0.6% to 105.8 points. The geopolitical strengthening of the Greenback seems to be over for now, while the Dollar is returning to a primary long-term upside scenario.

This scenario includes an initial weakening of the Dollar towards 1.07500-1.08500 for the EURUSD that would be likely temporary. Then the Greenback is seen to move to the ambitious target at the parity with the Euro. 

The Israeli-Palestinian conflict, strong U.S. Q3 GDP and persistent inflation derailed this scenario only for a short period. Though the Greenback strengthened less than 0.2% last week with the EURUSD moving to 1.05200. This doesn’t cancel a largely expected downside correction of the Dollar. The recent dynamic of the Greenback suggests that the EURUSD may climb rapidly to 1.07500-1.08500 by this Friday. The first part of this movement was made as the pair rose to 1.06940 highs last week. The second part of this rally is likely to be connected to the major events of this week. The Federal Reserve (Fed) will announce its monetary decisions this Wednesday, while Nonfarm Payrolls data will be released this Friday. The Fed is highly unlikely to raise its interest rates, while the tone of its chair Jerome Powell could be pretty much uncertain. He has a very justifying inflationary reason for a hawkish rhetoric, and he also has many reasons to sound neutral as the conditions in the debt market became very tight since the last Fed meeting in September.

If Powell will choose the second scenario, he can easily refer to a strong macroeconomic data. If this would be the case than Nonfarm Payrolls data would become even more important. Many analysts believe that the U.S. labour market data for October will be rather weak. Chances for neutral rhetoric by Powell and weak labour market data are more than 60%. It would be ideal fundamentals for the existing technical picture in the currency market that would lead to a correction of the Greenback.

The latest data on capital flows into WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) demonstrates a slowdown of inflows that support the idea of a correction of the Dollar. These new levels may provide more attractive entry points for a future strengthening of the Greenback.