US Dollar pauses amidst poor US data performances and dispersed Fed Minutes

July 4, 2024 1:20 pm

  • The US Dollar eases further after relatively dovish Fed Minutes.
  • The focus will be across the Atlantic, with the UK heading to the voting booth.
  • The US Dollar index bounces off 105.00, though selling pressure builds. 

The US Dollar (USD) sets forth its losing momentum by a third straight day in a row while US traders will not be making their way to the trading floor as US markets are closed due to Independence Day. However, there is much to digest after a rough day of US economic data on Wednesday, while several outside events occur on Thursday. The main event that will be building up towards the weekend will be the United Kingdom’s election outcome, where an end to the reign of the Tories party is forecasted after 14 years of being in power. 

On the US economic front, an empty calendar ahead, though, as mentioned above, outside data and headlines will drive the Greenback. German Factory Orders already came in at the lowest end of expectations, shrinking -1.6% in May. In addition, the rather disappointing data from Wednesday will still weigh on the US Dollar, with limited upside potential expected for the Greenback. 

Daily digest market movers: Voting booths in the UK are open

  • UK citizens are heading to the voting booth. Early results are not expected until late evening and overnight. However, exit polls and comments from key politicians could generate headling in due time. Keeping an eye on the Cable (GBP/USD) will be key for the remainder of the week. 
  • The New York Times proclaimed that US President Joe Biden is considering withdrawing from the Presidential race. 
  • The US Federal Reserve Minutes showed the same message as markets heard over the past few weeks: more data is needed to confirm inflation is coming down. However, the Federal Open Market Committee (FOMC) is divided on how long rates need to stay elevated. 
  • European equities are marginally in the green, along with Asia, where Japan is leading the surge. US futures are flat and are facing less trading volume than usual due to the public holiday. 
  • The CME Fedwatch Tool is broadly backing a rate cut in September despite recent comments from Fed officials. The odds now stand at 67.3% for a 25-basis-point cut. A rate pause stands at a 26.5% chance, while a 50-basis-point rate cut has a slim 6.2% possibility. 
  • The US 10-year benchmark rate trades at 4.36%, near its weekly low. Note that the US bond market is closed due to the public holiday.

US Dollar Index Technical Analysis: Softer data does not support DXY

The US Dollar Index (DXY) eased quite substantially on Wednesday after a wave of softer US data made the DXY fell to 105.00. Luckily, Dollar bulls came in quickly to salvage the situation and push it back above the 55-day Simple Moving Average (SMA) at 105.32. Though, selling pressure is building on that support with another test early Thursday. Pressure could build in the runup towards Friday, when the Nonfarm Payrolls could be the catalyst that pushes the DXY all the way back to 104.75, which is the next key support. 

On the upside, 105.53 and 105.89 are the first nearby pivotal levels. Once a daily close above those levels, the red descending trend line in the chart around 106.23 and the April’s peak at 106.52 are the two main resistances ahead of a fresh nine-month high. That would be reached once 107.35 is broken to the upside. 

On the downside, the 55-day SMA at 105.22 safeguard the 105.00 round figure. A touch lower, near 104.76 and 104.44, both the 100-day and the 200-day SMA form a double layer of protection to support any declines together with the green ascending trendline from last December. 

US Dollar Index: Daily Chart

US Dollar Index: Daily Chart

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.

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