DXY: Dollar index rallies after strong data but vaccine pressure remains

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his wife, son,… read more.
on Nov 24, 2020
  • US dollar index rally paused during the Asian session as traders digested the latest vaccine and politics
  • Recent news has led risk-on investors to abandon the US dollar to other currencies
  • The dollar also rose because of the strong services and manufacturing PMI data.

The US dollar index (DXY) rose by as much as 0.70% during the American session after the strong flash manufacturing and services PMI numbers. These gains helped to partially offset the 0.90% losses the index made last week.

US dollar index 45-minute chart

US economy does well amid a pandemic

Recent Covid-19 cases statistics from the United States have not been pleasing. Yesterday, health officials confirmed more than 141k new cases, bringing the total number to more than 12.4 million. Deaths have risen to more than 257,000. That has led to substantial restrictions in most states, including California, New Mexico, and Oregon.

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Yet, the manufacturing and services sectors in the US did well in November. According to Markit, the preliminary manufacturing PMI rose from 53.4 in October to 56.7 in November, the sharpest increase since March 2015. The number was better than the median estimate of 53.0.

The important services sector also did exemplary well too. The PMI rose to 57.7 in November from 56.9 in the previous month. That increase was higher than the estimated 55.0.

Subsequently, the composite index, which combines various indexes in the manufacturing and services PMIs moved from 56.3 in October to 57.9 in November.

The report cited record increases in business activity, with orders rising. That led to higher employment and unprecedented increases in prices. Subsequently, business confidence rose to the highest level since May 2014. In a statement, Chris Williamson, a business economist at Markit said:

“Expectations about the year ahead have surged to the most optimistic for over six years, reflecting the combination of a post-election lift to confidence and encouraging news that vaccines.”

Vaccine news has hurt the US dollar

While the recent developments on vaccines has been a good thing, it has generally hurt the dollar index. That is because risk-on investors in forex have exited their dollar positions and instead moved to other currencies. Indeed, emerging market currencies from countries like South Africa, Turkey, and Mexico have been among the biggest winners.

The latest political situation in the US has also favoured other currencies. Ideally, the political risks that analysts were expecting such as violence has not worked out. Indeed, after a series of court losses, Donald Trump told his administration officials to start cooperating with Joe Biden.

US dollar index technical outlook

Dollar index
EUR/USD technical chart

On the daily chart, we see that the dollar index has been under pressure in the past few months. It has fallen by more than 10% since March, the worst decline in years. At the current price of $92.46, the index is slightly below the 78.6% Fibonacci retracement level. Further, it is below the important resistance at $94.70 and the 25-day moving average. Therefore, I predict that the index will continue falling as bears aim for the next support at this year’s low at $91.75.

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