- The US Dollar trades broadly sideways after Wednesday’s wild ride following the Fed decision to hold interest rates.
- Traders took the Fed’s rate decision and rhetoric as less hawkish than feared.
- The US Dollar Index holds ground above 105.50 despite several attempts from bears to break lower.
The US Dollar (USD) enters some calm waters on Thursday after a rollercoaster ride on Wednesday following the Federal Reserve’s (Fed) monetary policy decision. The big batch of economic data on Wednesday together with the Fed’s policy meeting and Chairman Jerome Powell’s speech was the dream scenario for an uptick in the US Dollar Index (DXY), but this scenario failed to materialize and the index fell to 105.43, near the low of this week. Although it looked for a moment that the US Dollar could weaken further, it still holds ground and is likely to stay there until the US Nonfarm Payrolls data on Friday as the next catalyst.
On the economic data front, some appetisers ahead of the Nonfarm Payrolls print and the broader employment report on Friday. Traders can feast on the weekly Jobless Claims numbers and the Challenger Job Cuts number to look for clues if those announced layoffs during the recent earnings season are starting to weigh on the labor market. The Challenger Job Cuts for April were less severe as the previous month with only 64,789 layoffs reported.
Daily digest market movers: Not bad at all
- A substantial move on the charts in USD/JPY and EUR/JPY on Wednesday, pointing to a possible intervention again from either the Bank of Japan (BoJ) or the Ministry of Finance, though no official confirmations were issued.
- Kickoff this Thursday was at 11:30 GMT with the April Challenger Job Cuts report. the previous number was at 90,309 and came in for April at 64,789.
- At 12:30 GMT, the bigger part of the data for Thursday is to be released:
- Weekly Initial Jobless Claims expected to head to 212,000 from 207,000.
- Continuing Claims were at 1.781 million last week, with no forecast available.
- The US Goods and Trade balance from March is to be released:
- The Goods Trade Balance deficit was previously at $91.8 billion.
- Goods and Services Trade Balance expected to head from a deficit of $68.9 billion to a deficit of $69.1 billion.
- Nonfarm Productivity growth for the first quarter of 2024 should slow down from 3.2% to 0.8%.
- Unit Labor Costs are expected to accelerate substantially, from 0.4% to 3.2%.
- Near 14:00 GMT, the monthly factory orders for March are expected to increase by 1.6%, higher than the 1.4% advance seen a month earlier.
- Equities trade mixed on Thursday morning, with European equities mildly in the red while US Futures are mildly in the green.
- The CME Fedwatch Tool suggests a 91.1% probability that June will still see no change to the Federal Reserve’s fed fund rate. Odds of a rate cut in July are also out of the cards, while for September the tool shows a 56% chance that rates will be lower than current levels.
- The benchmark 10-year US Treasury Note trades around 4.59% and keeps lingering around this level.
US Dollar Index Technical Analysis: Consolidation
The US Dollar Index (DXY) had a roller coaster ride on Wednesday while European markets were closed for Labor Day. Despite the moves and selling pressure in the DXY, the floor at 105.50 still holds despite three failed breaks in the past two weeks. Dollar bulls are buying at these levels clearly, as support is still there. This could result in a breakout soon, with either bulls stepping away and letting the DXY drop or sellers giving up, seeing DXY shooting higher.
On the upside, 105.88 (a pivotal level since March 2023) needs to be recovered again with a daily close above it, before targeting the April 16 high at 106.52 for a third time. Further up and above the 107.00 round level, the DXY index could meet resistance at 107.35, the October 3 high.
On the downside, 105.12 and 104.60 should act as support ahead of the 55-day and the 200-day Simple Moving Averages (SMAs) at 104.40 and 104.10, respectively. If those levels are unable to hold, the 100-day SMA near 103.75 is the next best candidate.
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.
