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  • EUR/USD tested the 1.1905 level as the dollar bounces back from fresh lows for the bearish cycle.
  • EU/US recovery divergence in the PMIs could be a theme to support the DXY.

EUR/USD is currently trading at 1.1921 having tested bullish commitments t a low of 1.1905 having fallen from a high of 1.2011 at the start of the New York day. 

The US dollar has recovered from a low of 91.74 to 92.39 the high for the day as it takes out the 92.20 resistance which could hold on a re-test, pressuring the euro below 1.1930/50.

The greenback made a recovery as the US session’s traders went bargain hunting, regarding the dollar oversold considering an upbeat Manufacturing PMI data released by the Institute of Supply Management. 

 ISM Manufacturing PMI for August arrived at 56.0, beating the median forecast of just 54.5. The data was important for the greenback because bulls can wave the US/EU divergence stick at the bears.

In comparison, the Eurozone manufacturing PMI was at 51.7 in August, flat from July. Positive sentiment towards the single currency had been underpinned by the ongoing signs of recovery in the Eurozone from a recession caused by the coronavirus.

If the narrative slows down on that front and the US economy marches on, it could serve as a foundation for the DXY to recover over coming weeks. 

Analysts at Rabobank note that the euro is also benefiting from the perception that Europe continues to control the pandemic much better than the US.

While this notion has not been so far undermined by the surge in new Covid-19 cases across the EU over the last few weeks, we would be reluctant to chase EUR/USD higher.

The analysts argue that the psychological level of 1.20 could prove tough to clear.

After a brief pop higher we may witness proper profit-taking on long EUR positions, which have reached stretched levels. 

From the perspective of technical analysis, a sharp pullback below the 1.17 pivot is required to dent the bullish bias in EUR/USD.

USD remains out of favour

However, from positioning data, it is evident that the dollar remains deeply out of favour amongst investors.

Net USD short positions remain elevated and unless market sentiment deteriorates markedly, or there is another financial market shock, the dollar is likely to remain on the back foot after Federal Reserve’s Chairman Jerome Powell hammered in the nail for the greenback last week.

The Fed is unlikely to raise rates in the coming years given that inflation has mostly been below the 2% target over the last few years and markets have priced that inflation is not expected to reach the 2% objective before 2023.

EUR/USD levels

 

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