US Dollar turns it up a notch with markets cautious ahead of CPI, Fed decision

June 11, 2024 1:42 pm

  • The US Dollar adds to Monday’s gains. 
  • The Greenback jumps after rumors President Macron was considering to resign. 
  • The US Dollar index trades just above 105.00 and flirts with nearby support levels.

The US Dollar (USD) trades in the green, above 105.00 on Tuesday, and is likely to not make any big moves in the coming hours unless something pivotal occurs. Despite its gains from Monday, after French President Emmanuel Macron called for snap elections in June, the sting is being taken out of the event with Marine Le Pen, head of the Far Right movement in France, will not be running in those . Though the DXY rally received another spark with the headline that President Macron was not considering to resign, which markets now interpret as that he actually was considering to resign, additn to more Euro weakness and US Dollar strength. 

On the economic front, the US Dollar index (DXY) moves alongside political news out of Europe ahead of Wednesday’s main events: the US Consumer Price Index for May and the Federal Reserve (Fed) interest rate decision. Before that, two very light data elements will find their way to the markets on Tuesday: the NFIB Business Optimism Index for May and the Redbook Index for the first week of June. 

Daily digest market movers: Wake me up when Wednesday starts

  • Headline hitting the wires on Tuesday comes from France, where Marine Le Pen, head of the Far Right movement, said she will not be running in the upcoming snap elections at the end of June. This can be considered as a victory for current French President Emmanuel Macron as his government sees its odds of surviving these snap elections rising with Le Pen now backing down. 
  • Around 10:00 GMT a strange headline emerged on all big news agencies from a person close to the French President Macron, commenting that the President did not consider to resign after the election results. This comment triggered another leg lower in the Euro against its peers, and resulted in an uptick for the US Dollar, with markets reading into this headline as ‘where there is smoke, there is fire’, presuming that the French President had considered to resign on Sunday. 
  • The Eurozone is cracking under pressure as well, with a broad bond sell off in the region. The spread between Italian and German bonds is rising with Italian yields rising quicker than German ones. Broading or widening yield spreads in the eurozone are often seen as stress and a negative sign in global markets. 
  • At 10:00 GMT, the National Federation of Independent Business (NFIB) has released its Business Optimism Index for May. The result was a beat on expectation an the previous print of 89.8, with 90.5 as number for May. 
  • At 12:55 GMT, the Redbook Index for the week ending June 7 will be released. The previous reading was at 5.8%, and no forecast is available. 
  • The US Treasury is set to unleash some debt to the markets
  • 52-week bill auction expected at 15:30 GMT.
  • 10-year Note Auction will be allocated at 17:00 GMT. 
  • Equities are taking a turn for the worse with all European equities on the back foot caused by widening spreads between countries in the Eurozone and that comment on French President Macron not considering resignation. All European equities are down by 1%, US futures are down by a quarter of a percentage. 
  • The CME FedWatch Tool shows a 45.6% chance of the Federal Reserve (Fed) interest rate at the current level in September. Odds for a 25 basic points rate cut stand at 50%, while a very slim 4.4% chance is priced in a 50 basic points rate cut
  • The benchmark 10-year US Treasury Note slides to the lowest level for this week, near 4.43%, and flirts with further declines. 

US Dollar Index Technical Analysis: Europe has issues

The US Dollar Index (DXY) could be summarised with one word on Tuesday: Yawn! Expect no big movements, with markets remaining sidelined ahead of the main US events for this week on Wednesday.

On the upside, there are some technical or pivotal levels to watch out for. The first is 105.52, a level that held support 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, a trifecta of Simple Moving Averages is now playing as support. First, and very close, is the 55-day SMA at 105.05. A touch lower, near 104.47, both the 100-day and the 200-day SMA are forming a double layer of protection to support any declines in the US Dollar index. Should this area be broken down, look for 104.00 to salvage the situation. 

Banking crisis FAQs

The Banking Crisis of March 2023 occurred when three US-based banks with heavy exposure to the tech-sector and crypto suffered a spike in withdrawals that revealed severe weaknesses in their balance sheets, resulting in their insolvency. The most high profile of the banks was California-based Silicon Valley Bank (SVB) which experienced a surge in withdrawal requests due to a combination of customers fearing fallout from the FTX debacle, and substantially higher returns being offered elsewhere.

In order to fulfill the redemptions, Silicon Valley Bank had to sell its holdings of predominantly US Treasury bonds. Due to the rise in interest rates caused by the Federal Reserve’s rapid tightening measures, however, Treasury bonds had substantially fallen in value. The news that SVB had taken a $1.8B loss from the sale of its bonds triggered a panic and precipitated a full scale run on the bank that ended with the Federal Deposit Insurance Corporation (FDIC) having to take it over.The crisis spread to San-Francisco-based First Republic which ended up being rescued by a coordinated effort from a group of large US banks. On March 19, Credit Suisse in Switzerland fell foul after several years of poor performance and had to be taken over by UBS.

The Banking Crisis was negative for the US Dollar (USD) because it changed expectations about the future course of interest rates. Prior to the crisis investors had expected the Federal Reserve (Fed) to continue raising interest rates to combat persistently high inflation, however, once it became clear how much stress this was placing on the banking sector by devaluing bank holdings of US Treasury bonds, the expectation was the Fed would pause or even reverse its policy trajectory. Since higher interest rates are positive for the US Dollar, it fell as it discounted the possibility of a policy pivot.

The Banking Crisis was a bullish event for Gold. Firstly it benefited from demand due to its status as a safe-haven asset. Secondly, it led to investors expecting the Federal Reserve (Fed) to pause its aggressive rate-hiking policy, out of fear of the impact on the financial stability of the banking system – lower interest rate expectations reduced the opportunity cost of holding Gold. Thirdly, Gold, which is priced in US Dollars (XAU/USD), rose in value because the US Dollar weakened.

Feed from

MoneyMaker FX EA Trading Robot