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The retreat in the United States dollar early in the past week proved very short-lived and in the end, the greenback continued to strengthen. Since mid-April, it has appreciated by more than 4 percent in TWI terms, according to a recent research report from UniCredit.
Importantly, this has happened despite IMM data on non-commercial commitments indicating that past extreme short positioning was heavily cut to around 63,350 net short contracts in the week ending on May 11. This represents a two-thirds reduction since the peak of over 188,000 net short positions hit on March 23.
This evidence suggests that appreciation in the greenback might gradually run out of steam going forward, but some caution has to be exercised at this juncture because previous excessive USD short exposure has been heavily cut but it still exists, which means the current short squeeze could have a bit further to run in the very near term.
Also, US yields continue to climb, especially at the long end of the curve, with the 10-year maturity now well exceeding the 3 percent threshold and with also real yields accelerating amid concerns about global economic growth, which could increase demand for the US dollar as a safe asset.
That said, EUR/USD bulls have to be patient in the very near term, also because EMU PMI surveys for May, the most important data releases in the coming days, are also expected to show another small decline, reflecting global economic uncertainty and the latest acceleration in oil prices.
"We acknowledge that downside risks to our current forecasts have increased, but unless there is evidence in the coming weeks that the global growth picture is seriously deteriorating, we keep our constructive view on EUR/USD for the rest of the year," the report added.
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