The Dollar is Ready to Jump

The U.S. Dollar Index (DXY) is falling by 0.4% to 104.18 points this week. The EURUSD is rising by 0.2% to 1.08740, which is better for the dollar after it was losing 0.6% to 1.09160 this Monday. The decline of the dollar began after the publication of May's Manufacturing PMI readings.

The S&P Manufacturing PMI rose to 51.3 points from 50.9 points, signalling increasing industrial business activity. Meanwhile, the ISM Manufacturing PMI recorded a decline to 48.7 points from 49.2 points. Wall Street decided to focus on the ISM version, which is more favourable for the market.

Yields on U.S. 10-year Treasuries dropped to 4.39% from 4.50%. Bets on interest rate cuts by the Federal Reserve (Fed) in September rose to 51.3% from 47.0%. Later on Monday, the Atlanta Fed released its GDPNow estimate for Q2 2024, showing a slowdown to 1.8% QoQ from 2.7% QoQ. This model usually provides accurate forecasts, which could further contribute to the market's strong reaction.

Plummeting oil prices are having a positive effect on stocks as well. The Organisation of the Petroleum Exporting Countries and its allies (OPEC+) decided to keep oil production cuts for Q3 2024 only, which truly disappointed investors who were expecting an extension of quotas until the end of 2024. Oil prices dropped by 3.8% to $78.40 per barrel of Brent crude on Monday, and by a further 1.6% to $77.12 per barrel on Tuesday. Brent crude has lost 11.0% overall since the beginning of May. This is a strong anti-inflation factor and largely guarantees that inflation in May and June is likely to slow down. This may prompt the Fed to signal interest rate cuts in September.

The Bank of Canada (BoC) and the European Central Bank (ECB) are likely to be the first to cut their interest rates this week. The BoC is expected to cut its rate to 4.75% from 5.00% this Wednesday, and the ECB may cut its interest rate to 4.25% from 4.50% after its meeting on Thursday. Therefore, the Dollar has some time to strengthen before the Fed cuts its rates in September.

Interest rate cuts by the BoC and ECB should favour Dollar strengthening as the U.S. will still have higher borrowing costs for at least another 2-3 months. The WisdomTree Bloomberg US Dollar Bullish Fund (USDU) reported five positive weeks of fund flows and three neutral.

Investors are waiting for the Greenback to strengthen. In this context, the rise of the EURUSD is justified, as large investors are increasing their positions to edge out smaller private investors. Thus, an update of the EURUSD highs was necessary. There are no more barriers left for the Dollar to strengthen.