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Market Analyst
The U.S. dollar index has held roughly flat through a cluster of Federal Reserve, European Central Bank and Bank of Japan decisions, despite rising inflation and growth. The U.S. dollar is not rising with inflation largely because traders are repricing expectations for the Federal Reserve, leaving the currency more exposed to weak data than to strong numbers. On the euro side, speculative traders hold record gross short exposure, yet EUR/USD has held above its May low. That combination puts the spotlight on how the dollar reacts when U.S. data softens.
Matt Simpson, StoneX Media Market Analyst at StoneX, covers currencies, equity indices, gold and oil, along with the macro themes and market sentiment that move them. That coverage gives insight into what is driving the U.S. dollar, from central bank decisions and Federal Reserve repricing to euro positioning.
The U.S. dollar index has failed to rally on rising inflation and rising growth, holding roughly flat across a run of major central bank meetings. Notably, the dollar index is on track for a weekly shooting star candle, which may form a lower high and a potential key reversal. "If the U.S. dollar can't go up on rising inflation and rising growth, then it might not take much weak data to come through to help this one pull back," Simpson says. For dollar traders, the focus moves from how strong U.S. data is to how the currency reacts when the numbers soften.
Weak U.S. data is the pressure point for a stalled U.S. dollar, as traders reprice their expectations for the Federal Reserve. According to Simpson, "we might not need too much weak data to see a bearish pullback", with the move driven by a repricing from Fed traders. The dollar index has already shown a lower high on the daily chart, while EUR/USD has bounced from a double bottom. Consequently, the dollar's reaction to soft U.S. releases has become the market's test of how far Federal Reserve repricing can run.
Pressure on the U.S. dollar shows up first in the Institute for Supply Management (ISM) manufacturing and services surveys, the main U.S. releases on the dollar calendar. Weekly positioning data on the euro shows how crowded the speculative short side has become, evidenced by gross short exposure at a record and net short exposure just below one. Price action in EUR/USD around its May low shows how far that positioning is being tested.
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: Matt Simpson, StoneX Media Market Analyst
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