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  • EUR/USD has slipped to fresh lows of the day under the 1.2200 level in recent trade amid a broad pick up in the US dollar.
  • No specific catalyst has been behind the dollar’s recent rise, but DXY has managed to cross back above 90.50.

USD has been seeing upside in recent trade, with the Dollar Index recently surpassing the 90.50 level, meaning the index now trades with gains of more than half a percent on the day. The move higher in DXY has coincided with a slide beneath the 1.2200 level in EUR/USD, which now trades in the 1.2170s, down about 0.6% or 70 pips on the day.  

Reasons for USD pick up

Pre-4pm London fix flows seem to have gone in favour of the US dollar and worked against the euro. For context, the 4pm London fix is a 2 minute time period from 16:00GMT during which time major asset managers and institutions around the world take the average of exchange rates to value their international portfolio holding. Therefore, this time period and the run up to it every day can see FX volatility rise, as seems to have been the case today.  

More broadly, amid very thin pre-Christmas holiday conditions, it is probably wise not to read too much into any particular market move, such as this latest bout of USD strength, which seems not to have been spurred by any particular macro or fundamental catalyst. 

Note also that though FX, bond and commodity markets are positioned a little more defensively on Tuesday, the S&P 500 still trading broadly flat on the day. There is every possibility that markets continue to trade without a clear bias like this for the remainder of the week, as institutions continue with pre-year end position adjustments.

But a few underlying themes could be giving the US dollar a helping hand…

1) Lingering European Covid-19 concerns – Covid-19 concerns tend to be a positive for safe-haven USD, so perhaps it is unsurprising to see that the DXY is retaining a decent bid and up from last week’s sub-90.00 lows given the news over the weekend of the rapidly spreading new variant of Covid-19 in the UK and the associated announcement of tighter lockdowns in the country and of international travel bans on incoming passengers coming from the UK. The fact that this is happening away from American shores and weighing on the European economy is likely also a factor helping the USD.  

2) Soft US Consumer Confidence Data – The Conference Board released its latest Consumer Confidence numbers at 15:00GMT, which broadly underwhelmed expectations. Though there was not much of a reaction at the time, some “safe-haven” follow through into the USD might be being observed right now. Lynn Franco, Senior Director of Economic Indicators at The Conference Board, summarised the downbeat report; “Consumers’ assessment of current conditions deteriorated sharply in December, as the resurgence of COVID-19 remains a drag on confidence. As a result, consumers’ vacation intentions, which had notably improved in October, have retreated. On the flip side, as consumers continue to hunker down at home, intentions to purchase appliances have risen. Overall, it appears that growth has weakened further in Q4, and consumers do not foresee the economy gaining any significant momentum in early 2021.”

Dollar bulls beware of a surprise Brexit deal

However, one factor to consider that might derail recent USD gains is the theme of Brexit; rumours are swirling in Brussels that a Brexit deal is “close but not quite there”, tweeted BBC’s Katya Adler. If officials publicly confirm that the two sides are on the cusp of a deal, or have even already reached one, GBP is likely to see significant gains, which is likely to lift the likes of EUR/USD as well and hit the dollar across the board – A Brexit deal could easily send DXY back below 90.00 and towards recent lows in the 89.70s.