Market Data 
- The US Dollar trades mildly up as the possible escalation in the Middle East conflict drives flows towards the Greenback.
- Fed speakers are starting to align with market expectations for gradual to no rate cuts this year.
- The US Dollar Index rally could pick up steam if Donald Trump leads further in the polls.
The US Dollar (USD) is a little bit in favor this Monday as three main factors provide some support for the Greenback. The first one is geopolitics, with Israel’s Prime Minister Benjamin Netanyahu vowing to step up retaliations after an Iranian drone struck near his private residence over the weekend. The second driver is coming from the Federal Reserve (Fed) after a few of its officials called for a gradual approach to reduce interest rates (or even no rate cuts) in order to retain control of inflation. Finally, the third driver is the upcoming US presidential election on November 5 with a small lead on the betting websites for former US President Donald Trump, which supports a stronger US Dollar.
The US calendar is very light in terms of economic data on Monday. Besides the US Treasury set to issue some more debt into the markets, four Fed members will speak. Markets will want to look for further confirmation from the Fed on the rate cut projections for the meetings in November and December after Atlanta Fed President Raphael Bostic said last week that the Fed should refrain from cutting.
Daily digest market movers: All is quiet
- Federal Reserve Bank of Dallas President Lorie Logan is set to speak at 12:55 GMT. Logan participates in a conversation at the 2024 SIFMA (Securities Industry and Financial Markets Association) Annual Meeting.
- At 17:00 GMT, Federal Reserve Bank of Minneapolis President Neel Kashkari participates in a town hall event hosted by the Chippewa Falls Chamber of Commerce in Chippewa Falls, Wisconsin.
- At 21:05 GMT, Federal Reserve Bank of Kansas City President Jeffrey Schmid delivers remarks about the US economic and monetary policy outlook at an event organized by the Chartered Financial Analyst Society in Kansas City.
- Federal Reserve Bank of San Francisco President Mary Daly is set to participate in a moderated Q&A session with the Wall Street Journal’s Nick Timiraos at the 2024 WSJ Tech Live at 22:40 GMT.
- Equities are taking a taling a turn for the worse with US futures turning negative on the day.
- The CME Fed rate expectation for the meeting on November 7 shows a 92.3% probability of a 25 basis points (bps) rate cut, while the remaining 7.7% is pricing in no rate cut. Chances for a 50 bps rate cut have been fully priced out.
- The US 10-year benchmark rate is trading at 4.11% after having flirted with a break below 4% on Wednesday.
US Dollar Index Technical Analysis: Not peaked yet
The US Dollar Index (DXY) holds strong near last week’s peak. Expectations of a gradual approach to interest rate cuts by the Fed would support a stronger US Dollar. More upside could take place should former President Donald Trump take a further lead in the polls or gain a swing state majority, or should geopolitical tensions in the Middle East swirl further out of control.
A firm resistance ahead is 103.80, which aligns with the 200-day SMA. Above that, there is a small gap before hitting the pivotal level at 103.99 (the June 4 low) and the 104.00 big figure. Should geopolitical tensions increase or Trump further lead in the polls, a rapid swing up to the 105.00 round level and 105.53 (the April 11 high) could be on the cards.
On the downside, the 100-day SMA at 103.19 and the pivotal level at 103.18 (the March 12 high) are now acting as support and should prevent the DXY from falling lower. With the Relative Strength Index in overbought territory, a test on this level looks granted. Further down, the 55-day SMA at 101.86 and the pivotal level at 101.90 (the December 22, 2023, high) should avoid further downside moves.
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.
