Dollar Bulls in the Driver Seat, but Consolidation Looms

fundamental analysis Dollar Bulls in the Driver Seat but Consolidation Looms

The euro has completed its eighth consecutive week depreciating against the dollar.  This is the longest such streak in its relatively short history.  

The short-term speculative market has amassed a significant short euro position. Although the ECB may have surprised many with the rate cut and the clear commitment to ABS/covered bond purchases, the market has anticipated an increasing divergence between the US and euro area in terms of economic performance and monetary policy.  

However, the supportive news stream may have peaked until the FOMC meeting and launch of the TLTRO.   The German factory orders and industrial output data were significantly stronger than expected.  This suggests the euro area's largest economy is not about to slip into a recession despite the contraction in Q2 GDP.  It also points to a favorable euro area aggregate figure on September 12 (upside risk to the consensus forecast of 0.6% after -0.3% in June). At the same time, the weakest net job creation in the US this year may temper enthusiasm that had been building for an earlier start to the US rate cycle. A truce in Ukraine would also be consistent with a modest shift in the news stream.