FX Market Update: US Dollar Index Golden Cross Points to More Gains

Euro pressured amid weak economic growth

The euro continued its strong downward trend after a series of weak economic numbers from the European Union. The EUR/USD pair plunged to a low of 1.0335, its lowest level since 2022 and 7.80% from its highest level this year.

This trend continued after a series of weak economic data. According to S&P Global, the economy European manufacturing PMI dropped to 45.2, lower than the median estimate at 46. The composite PMI dropped from 50 to 48.1, a sign that the economy is contracting.

Another report showed that the German GDP contracted by 0.3% on a YoY basis, missing the analyst estimate of minus 0.2%.

These numbers mean that the European Central Bank (ECB) may continue cutting interest rates in the coming meetings. It has already slashed them three times this year, making it one of the most dovish banks in the industry.

The euro has also slumped after Donald Trump won the American presidency. One of his proposed policies is on trade, which he has pledged to implement more tariffs. In a statement, analysts at ING said:

Given the heavy macro/geopolitical factors favouring the downside and the fact that EUR/USD is not particularly undervalued based on our medium term models, we certainly do not want to stand in the way of a EUR/USD move to parity nor fight the rise in higher traded volatility levels.

ING

British pound sell-off accelerates

The GBP/USD exchange rate continued its downtrend, reaching a low of 1.2493, its lowest point since May.

This decline happened after the Office of National Statistics (ONS) published mixed economic numbers from the country.

The first report showed that the country’s inflation continued rising in October, a big blow to the Bank of England. The headline CPI rose from 0.0% in September to 0.6% to October, translating to an annualized increase of 2.3%. Core inflation rose to 3.3% during the month.

Another report showed that the country’s retail sales continued worsening in October. The headline retail sales data dropped by 0.7% on a MoM basis and 2.4% on a YoY basis. These numbers were worse than the median estimate of minus 0.3% and 3.4%.

Core sales, which excludes the volatile food and energy prices, dropped by 0.9%. Meanwhile, the manufacturing and services PMI numbers dropped to 48.6 and 50, respectively.

Therefore, these numbers mean that the Bank of England will be under pressure when delivering its last decision of the year in December. A decision to cut more rates would worsen the inflation situation, while a hike may drag the recovery.

New Zealand dollar plunges ahead of RBNZ decision

The NZD/USD pair dropped to 0.5817, its lowest level since November 1 as the US dollar strength continued.

This pair will be in focus this week as investors react to the upcoming Reserve Bank of New Zealand (RBNZ) decision. Economists expect the bank to deliver another 0.50% cut, which will bring the benchmark rate to 4.25%. If this happens, it will be the third consecutive cut that the bank has made.

The bank’s rate cuts are justified because the economy has softened recently and inflation has continued moving downwards. Data showed that the headline Consumer Price Index (CPI) dropped from 7.7% in 2022 to 2.2% in the last quarter. There are signs that the country’s inflation will continue falling and move below the bank’s target of 2.0%.

US dollar index rally continues

The US dollar index has continued its strong uptrend in the past few months. It has jumped from the year-to-date low of $100 to $108. Most notably, it has formed a golden cross as the 50-day and 200-day Exponential Moving Averages (EMA) have made a bullish crossover. In most periods, this pattern is one of the most bullish patterns in the market.

The US dollar has jumped after Donald Trump won the election. His victory may stir inflation in the country because of his plan to deport millions of undocumented migrants and hike tariffs on imports.

Additionally, there are signs that the Federal Reserve may not cut interest rates in its last meeting in December. It has already slashed interest rates by 0.75% this year as inflation continued falling.

Nigerian naira crashes to a record low

The Nigerian naira plunged to a record low, continuing a downtrend that has been happening in the past few years. The USD/NGN exchange rate was trading at 1,700, a big jump for a pair that was trading below 500 in 2023.

This crash happened as the country continued to experience a severe dollar shortage and as most Nigerians moved to foreign currencies. Several international companies have already left the country because of its currency woes.

The key catalyst for the Nigerian naira will be the central bank’s decision on Wednesday. Analysts see the bank hiking interest rates to 28% in a bid to boost the local currency.