CFTC report: investors buy US dollar. Outlook for USD, EUR, GBP

According to CFTC data released on Friday, the bullish position on the US dollar rose for the third week in a row. Investors increased their combined long position by 2.4 billion, to 19.96 billion, and are within a couple of steps of the May highs. This adjustment comes on the back of a slight decline in the US dollar against major currencies, except for the yen.

The sharp decline in the long position in gold lost 4.135 billion during the week and decreased to 16.25 billion. Investments in oil, copper, and food products are reduced, and there are gloomy expectations of a new wave of the global crisis.

Friday’s price movement was mainly due to a reaction to weaker-than-expected PMI data. In Europe, both the service business activity index and the manufacturing PMI in Germany fell below 50, with the European composite PMI dropping to 49.4 from 52. For the composite index, this has been the first drop into contraction territory since 2013.

In the US, the PMI decline was even more pronounced, with activity in the services sector falling to 47.5 from 52.3, well below forecasts, the index is at its lowest level since 2009, barring a brief dip in early 2020, due to lockdowns. The US manufacturing PMI was stable at 52.3 against the previously expected 52 and 51.7.

EUR/USD

Before the publication of the PMI indices, there was some hope that the eurozone economy was resilient, given the looming economic crisis, and activity remained at a high level. However, the strong contraction suggests that this is only the beginning, as none of the long-term factors slowing down the economy may stop affecting it in the nearest future.

The reaction to the European PMI has triggered a rise in EU yields and lower expectations of an ECB interest rate hike. The market still sees a 50 rate hike in September, but subsequent hikes are not expected to exceed 75 in aggregate.

The euro’s net short position fell by 2.3 billion during the reporting week, to -5.484 billion, and now the euro has the most tangible negative balance against the US dollar, overtaking the yen. The euro fell below parity last week. This reflects growing concerns about eurozone energy security. The settlement price has lost momentum but is still well below its long-term average.

Last week, we estimated that after the attempt to go below the parity the technical correction to the resistance 1.0350 or further to the border of the channel 1.0410-40 is possible. The pullback took place, and the growth above the mentioned resistance levels is possible. However, there are no reasons to expect the end of the bearish trend in the long term. We expect that after the consolidation period the euro may resume its decline, and a retest to the parity looks reasonable.

GBP/USD

The UK was one of the few countries that showed stable business activity in July. The composite index fell to 52.8 from 53.7, slightly better than forecasts, and remained in the green zone. The PMI is at the level corresponding to just 0.2% GDP growth, while the forecast indicators are pointing at further deterioration. The manufacturing orders portfolio has contracted for the first time in a year and a half, and purchases of raw materials and hiring of workers have also declined. The main concerns are that the Bank of England will have to step up its fight against inflation and intends to raise interest rates faster, which will lead to a deterioration in financial conditions and negative GDP growth. However, this is a matter of concern for the vast majority of developed economies, which have to intensify their fight against inflation.

The net short position on the pound remained unchanged, a small upward correction of 99 million does not affect the overall bearish sentiment. Accumulated short position -4.3 billion, the estimated price is below the long-term average, the loss of momentum increases the chances of a corrective rise or the transition to temporary consolidation.

There are no reasons to expect a trend reversal. Correctional growth may continue to the boundary of the channel located at 1.2040-60 or slightly higher to 1.2130-60, after which the sell-off is highly likely to resume. The pandemic low from March 2020. The level of 1.1410 still serves as a benchmark as a possible long-term target.