- The US Dollar trades higher, with markets starting to label the Fed meeting as hawkish.
- Powell kept his cards close to his chest, not committing to any path for interest rates.
- The US Dollar index ticks up in that 30-day range between 104.00 and 105.50.
The US Dollar (USD) trades overall in the green against most peers on Thursday, making the US Dollar Index (DXY) trade in the green near 105.00. The devaluation of the Greenback seen on Wednesday after the disinflationary Consumer Price Index (CPI) numbers got partially erased by the US Federal Reserve (Fed) rate decision and its dot plot. Federal Open Market Committee (FOMC) members only see reason for one rate cut in 2024, and four in 2025, while markets were expecting two rate cuts for this year.
Fed Chairman Powell left markets rather clueless as he didn’t commit to any path for interest rates.. This means markets are likely to respond to upcoming data, and with the Producer Price Index (PPI) numbers on the docket, together with the weekly Jobless Claims, any soft number will be enough to trigger US Dollar easing. Similarly, upbeat economic data points will move the needle in favour of a stronger Greenback, making it a bumpy ride until that possible first interest-rate cut in September.
Daily digest market movers: Devil in the detail
- At 12:30 GMT, the weekly Jobless Claims and the Producer Price Index numbers will be released:
- Weekly jobless claims for the last week of May:
- Initial claims are expected to subside a little to 225,000 from 229,000.
- Continuing Jobless Claims should pick up to 1.800 million from 1.792 million.
- May’s Producer Price Index numbers:
- Monthly headline PPI is seen advancing by a marginal 0.1%, easing from the 0.5% increase seen in April. On year, headline PPI is seen rising to 2.5% from 2.2% .
- Monthly core PPI should ease as well to 0.3% from 0.5%. Yearly core PPI should remain stable at 2.4%.
- Weekly jobless claims for the last week of May:
- Federal Reserve Bank of New York President John Williams will be the first Fed speaker to come out of the blackout period that takes place during a Fed rate decision. Williams will participate in a moderated discussion at around 16:00 GMT with US Treasury Secretary Janet Yellen at the Economic Club of New York.
- Equities do not like to be left behind clueless by the Fed, with both Asian and European indexes trading in the red. US futures are up though, with a small exception for the Dow Jones Industrial Index.
- The CME FedWatch Tool shows a 38.5% chance of Fed interest rate at the current level in September. Odds for a 25-basis-points rate cut stand at 56.7%, while a very slim 4.8% chance is priced in for a 50-basis-points rate cut.
- The benchmark 10-year US Treasury Note slides to the lowest level for this month, near 4.31%.
US Dollar Index Technical Analysis: This could go either way
The US Dollar Index (DXY) faces the consequences of an eventful Wednesday that brought a disinflationary inflation report and a Fed rate decision that clouded the outlook. With the Fed not committing to any plan ahead, any softer data point this summer will contribute to a further easing for the Greenback. In case US data keeps easing, a weaker USD can be expected in the next few months.
On the upside, no big changes to the levels traders need to watch out for. The first is 105.52, a level that held during most of April. The next level to watch is 105.88, which triggered a rejection at the start of May and will likely play its role as resistance again. Further up, the biggest challenge remains at 106.51, the year-to-date high from April 16.
On the downside, the trifecta of Simple Moving Averages (SMA) is still playing support. First, and very close, is the 55-day SMA at 105.07. A touch lower, near 104.48, both the 100-day and the 200-day SMA are forming a double layer of protection to support any declines. Should this area be broken, look for 104.00 to salvage the situation.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
