The US dollar has strengthened following a selloff in big tech stocks and a robust jobs report, but analysts warn that the rally may be overstretched. The greenback gained ground even before the US payrolls report showed a stronger-than-expected increase of 165,000 jobs. The dollar's rise was driven by contagion into defensive stocks and global markets, particularly affecting higher-beta G10 currencies like the Australian dollar, Swedish krona, and Norwegian krone.
Analysts suggest that the dollar's rally depends on sustained risk-off sentiment. If the mood improves, the dollar could face a moderate correction, though it is unlikely to return to last week's lows of 101.1 on the DXY index. Tomorrow's October US CPI report is expected to show a 0.3% month-on-month increase for both headline and core inflation, supporting expectations for a December Fed hike with 19 basis points priced in.
The euro is considered undervalued against the dollar, with short-term undervaluation estimated at around 2.1-2.3%. The European Central Bank's succession story will be in focus, with Spain’s Pablo Hernández de Cos and the Netherlands’ Klaas Knot as the main candidates. The impact on the euro may be relatively contained and short-lived, as no candidate is expected to cause seismic changes.
The British pound remains overvalued against the euro, with EUR/GBP trading sharply below its short-term fair value. Bank of England Governor Andrew Bailey is expected to signal caution in further rate hikes, despite last week's hawkish hike. Market pricing for three more cuts is considered far too aggressive, arguing against further sterling strength against the euro.