Despite the recent sell-off, the downside potential looks limited at this stage

The dollar tries to bounce after the recent plunge amid a retreat in US Treasury yields from fresh long-term tops. Also, the safe-haven greenback suffered from some improvement in risk sentiment across the financial markets.

Wall Street stocks finished mixed on Monday, with the Nasdaq Composite closing higher after the benchmark 10-year Treasury note yield ticked down from above the 5% handle that was derailed for the first time since July 2007.

After finding a local bottom around one-month low of 105.35, the USD index stays below the 106.00 figure despite some recovery in recent trading. A failure to regain this level would pave the way towards the mentioned lows. However, the downside potential looks limited at this stage.

First, risk demand remains weak and unstained as investors continue to worry about geopolitics, elevated bond yields, and interest rates. Second, the euro looks unlikely to extend the recent bounce as the ECB could deliver more dovish signals during the upcoming meeting due on Thursday.

By the way, fresh data showed that the Eurozone PMI fell again in October by 0.9 points to 47.8. So, the index has thus been clearly in contraction territory for three months. Against this backdrop, the ECB is likely to revise its economic outlook further downwards, suggesting a further increase in the key interest rate is becoming increasingly unlikely as the economy continues to weaken.

After the release, the euro reversed south, pushing the dollar higher from local lows. EURUSD slipped from one-month highs around the 1.0700 to settle around 1.0630 in recent trading, with downside risks persisting while below the 1.0700 mark where the 55-DMA lies.

As for the greenback itself, the USD index needs to get back above 106.00 in the immediate term in order to retarget the recent highs around 106.30-106.40. Otherwise, sellers could reemerge to send the prices lower before another bounce takes place.


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