Last Monday, U.S. dollar rallied after a strong sell-off in risky currencies and various stock markets, leading to a rise in demand of the dollar. This strong sell-off was triggered mainly by the uncertainty in the U.S. election and the second wave of COVID-19 in Europe and Britain. As a result, the U.S. Dollar Index finally broke above its 6-week consolidation.
Eurozone services sector back in contraction
The number of COVID-19 cases in Europe continues to rise as the second wave of the pandemic hits. As a result, many restrictions were carried out in many European countries, sending business activities in the services sector back into contractionary levels in September as indicated in the preliminary release of the eurozone services PMI data. Since the euro has the highest weightage among the other currencies in the U.S. Dollar Index, its weakening contributed the most to the strengthening of the U.S. Dollar Index.
Fear of second lockdown in the UK
Meanwhile in the UK, medical experts warned that the death rate from COVID-19 may grow exponentially in the near future if the second wave of the pandemic is not contained in time. The country may also face up to 50,000 new cases a day by mid-October. At the moment, UK Prime Minister Boris Johnson has announced new restrictions, asking people to work from home whenever possible and has ordered hospitality places to close at 10pm. However, the fear of another COVID-19 lockdown led to a strong sell-off in the British pound as market participants flee to safe haven currencies like the U.S. dollar.
U.S. presidential election to overshadow jobs report
Despite the increased demand of the U.S. dollar, the strength of the U.S. Dollar Index stagnated ahead of the U.S. jobs report. Analysts expect jobs to be added in September albeit at a slower rate than in August. Average Hourly Earnings is expected to increase while the unemployment rate is expected to carry on its decline streak. In the event whereby the released data portrays an optimistic view on the labor market, the strengthening of the U.S. dollar may be limited as the stimulus bill talks between the Democratic Party and the Republican Party are still at an impasse. With the 3 November U.S. Presidential Election drawing near, the U.S. Dollar Index is expected to be volatile as the election precedes in importance over the other economic indicators.
(This article was originally published on Samtrade Academy on 30 September 2020)
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