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Market Insight: USD Momentum Very Elevated, EUR Likely Key To Any Turnaround

USD

USD momentum remains very strong, at least relative to key moving averages (MA). The first chart below plots the DXY index, which is inverted on chart, against the proportion of G10 currencies which are above key MAs against the USD. This metric looks at whether each G10 currency is above or below its 20, 50, 100 and 200 MA against the USD (see this link for more details on this metric).

  • Presently, the G10 currencies only have 1 out of a possible 36 MAs firmer against the USD. This is NOK, which is on the strong side of its 50 day MA.
  • Obviously, we are close to the zero bound on this metric, which we have hit on a number of occasions in 2022.
  • Interestingly, the DXY has peaked not long after we have hit this zero bound on a number several times this year. This may reflect upside USD momentum running out of steam, or profit-taking flows on long USD positions.
  • The exception though was back in late April/early May when the index kept moving higher, although we were at lower levels in the DXY back then compared to now.
  • Ultimately shifts lower in the DXY from these peaks have proven to be short lived, before the uptrend resumes once again.

Fig 1: G10 FX Moving Average Momentum & DXY Trend


Source: MNI - Market News/Bloomberg

  • In the current context, any turnaround in USD momentum is likely to be quite EUR dependent. The euro's weight in USD indices is quite high and correlates well with the rest of the G10 bloc.
  • Some macro drivers have turned less bearish for the EUR, at least in a relative sense. The second chart below plots EUR/USD against the 2yr swap spread with the US.
  • Outright spreads are still heavily in favor of the USD (-170bps), but momentum has tilted the other way (+50bps from recent lows). It's a similar backdrop for the relative terms of trade, given recent falls in EU gas prices.
  • The 20-day MA for EUR/USD comes in at 1.0111 (versus current spot at 1.0040). Also note we have key event risk later today, with the EU CPI due.

Fig 2: EUR/USD & EU-US 2yr Swap Spread

Source: MNI - Market News/Bloomberg


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