Speculative dollar sentiment worsens

Data releases continue to fail to inspire markets despite the continuing run of better than expected numbers. In the US the Chicago PMI reached the critical boom/bust level of 50.0 in August whilst the less closely followed Milwaukee PMI surged into expansion territory at 56.0.  This revealed some upside risk to the ISM manufacturing index which duly beat consensus coming at 52.9 in August.  The fact that positive data is failing to lift markets is a sign of fatigue and stock markets appear to be running out of fuel.

From an FX perspective these developments will not be sufficient to provoke a break out of well worn ranges. Risk trades remain in favour but the momentum is limited. The prognosis does not look as positive for the dollar as the generally improving environment for risk will play negatively. Speculative sentiment (CFTC Commitment of Traders IMM data) has indeed worsened for the dollar; IMM data revealed net dollar short positions increasing sharply in the latest week, with market positioning worse than the 3-month average.

Much will depend on the US jobs report on Friday but until then the dollar is likely to cling to the weaker end of ranges. I believe that the dollar index will avoid dropping below its August 5th low of 77.428. The main exception to dollar weakness appears to be sterling where sentiment has become more bearish recently. This was reflected in the IMM report in which aside from the dollar, the pound has also been a loser and the only other currency for which speculative appetite worsened.

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