• USD Strength: The dollar rallied, breaking key levels (EUR/USD below 1.05, DXY above 107.0), driven by safe-haven demand amid geopolitical tensions, mixed US economic data, and hawkish remarks from Fed’s John Williams.
• PMI Expectations: US PMIs are expected to remain strong (~54), contrasting with weaker eurozone activity surveys, reinforcing the USD:EUR rate differential and supporting further dollar strength.
• EUR Risks: Eurozone PMIs, particularly Germany’s, are under scrutiny; weak data could exacerbate euro pressure, intensify parity speculation, and reflect the growing monetary policy divergence.
• GBP Insights: UK PMIs are forecast to stabilize (~51.8), while disappointing retail sales data hints at slight GBP weakness; German PMI underperformance could favor further downside in EUR/GBP.
• Market Outlook: DXY is likely to consolidate above 107.0 unless eurozone PMIs surprise to the upside; EUR/USD’s drop below 1.050 aligns with policy-driven trends rather than short-term anomalies.

USD: Hawkish Hints from Williams Drive Dollar Strength
Yesterday saw the dollar surge, breaking below the pivotal 1.05 support level in EUR/USD and pushing DXY above 107.0. The rally wasn’t driven by a single factor but a blend of market influences.

Heightened concerns over the Russia-Ukraine conflict spurred a flight to safe-haven assets like the dollar. Meanwhile, mixed macroeconomic signals added complexity: jobless claims dropped unexpectedly, yet continuing claims rose, and indicators like the Leading Index and Philadelphia Fed Business Outlook fell short of expectations. However, New York Fed President John Williams’ remarks may have tipped the scales. In a surprisingly hawkish tone, Williams stated that inflation control isn’t complete and that the job market must cool further before easing is feasible.

Today, PMI data from developed markets could shape the dollar’s trajectory. Recent surveys highlight a stark contrast between the US and eurozone economies, reinforcing the USD:EUR interest rate differential. Expectations for the US composite PMI hover around a solid 54, which could sustain the dollar’s strength. Unless eurozone PMIs outperform, DXY seems more likely to hold above 107.0 than correct downward in the near term.

EUR: German PMIs Could Spell Trouble for the Euro
The EUR/USD dip below 1.050 reflects the growing gap in US and eurozone monetary policies, as evidenced by the 2-year swap rate spread of around 180bp. This rate disparity has eclipsed equities in driving the pair’s movements, leaving risk sentiment with little influence.

Today’s eurozone PMIs are pivotal for both the ECB and the euro. Economists expect a composite reading of 50.2, near consensus for a flat 50.0. However, German PMIs may disappoint, with risks pointing to a sub-47.0 reading. While a stable eurozone composite figure might offer slight support, weak German data could weigh heavily on the euro, amplifying speculation about parity with the dollar. While we remain bearish on EUR/USD, a move to parity could represent an overextension of current trends.

GBP: PMIs and Retail Sales Create EUR/GBP Pressure
The EUR/GBP pair often reacts strongly to PMI releases, as they influence perceptions of relative economic performance. UK PMIs are expected to stabilize around 51.8, which could pressure EUR/GBP if German PMIs underperform.

Today’s UK retail sales figures delivered a surprise, showing a steeper-than-expected decline alongside downward revisions for October. Initial market reactions hint at slight GBP weakness. However, we foresee continued downside risks for EUR/GBP, with potential for a dip below 0.8300 in the near term.