US Dollar Unfazed by Weak Manufacturing Data, European Turmoil Fuels Strength
European Bond Market Distress and ECB Concerns
European sovereign bond spreads, particularly between French and German bonds, are widening significantly. This divergence raises concerns for the European Central Bank (ECB), as it complicates its ability to control inflation across the Eurozone. If the bond market rout continues, the ECB might be forced to intervene to maintain cohesion and support its monetary policy goals.
Market Drivers: Focus on EU Bonds and US Data
- European Political Instability: French President Macron's decision to call snap elections and the possibility of a far-right-dominated parliament have spooked investors, fueling risk aversion and driving demand for safe-haven assets like the USD.
- Bond Market Turmoil: Widening sovereign bond spreads in Europe are raising concerns about financial stability and potential intervention by the ECB.
- Weak US Manufacturing Data: The NY Empire State Manufacturing Index showed a contraction in June, adding to the mixed economic signals from the US.
- Upcoming US Data: Investors are looking ahead to US Retail Sales on Tuesday and Purchasing Managers' Index (PMI) data on Friday for further clues on the economic outlook.
DXY Technical Analysis: Potential for Volatility Ahead
The DXY is currently trading near the 105.52 resistance level, which held as support during most of April. Further upside potential is limited by the 105.88 level and the year-to-date high of 106.51.
On the downside, the 55-day, 100-day, and 200-day Simple Moving Averages (SMAs) near 105.10 and 104.55 are providing support. A break below this area could trigger further declines towards 104.00.
The US Dollar's current strength may be short-lived if European political risks subside and upcoming US data disappoints. Traders should remain cautious and monitor both European developments and US economic indicators closely.