- The US Dollar eases a touch despite safe-haven support on early Friday trading.
- Tensions in the Middle East flared up again with reports of Israel attacking an Iranian military base.
- The US Dollar Index holds above 106.00, though pressure is mounting for a break below it.
The US Dollar Index (DXY), which tracks the US Dollar against a basket of six major currencies, eases and gives up earlier gains driven by the reports of the attack from Israel on Iran, confirmed by US officials. While markets are awaiting any comments or headlines out of Iran, some easing is taking place in safe-haven assets after earlier big inflows in the Greenback, the Japanese Yen (JPY) and the Swiss Franc (CHF). Any harsh rhetoric from Iran might cause a resurgence in the safe-haven demand and further sell-off in risk assets.
On the economic data front, a very thin calendar on Friday, with only Federal Reserve Bank of Chicago President Austan Goolsbee set to speak at a Conference in Chicago. For the main part of the day, markets will be focused on any headline coming out of the Middle East. In terms of rate projections, should Oil prices remain elevated for months to come, the US Federal Reserve (Fed) might have an issue with inflation accelerating because of the rising energy component.
Daily digest market movers: Steady for now
- Tensions flared up in the Middle East after Israel targeted an Iranian military airforce base and triggered a shock across the markets in several asset classes, though some easing is taking place:
- Equities were slumping in the red, though off the lows now.
- Bonds are still in demanded, with yields declining.
- Both the Greenback, the Swiss Franc and the Japanese Yen saw substantial inflows, though are starting to see outlflow now.
- In the commodity space, both Brent and Crude are trading in the red after earlier spiking higher.
- De-escalation is taking place with markets seeing the attack only as small, while Iran said it sees no need to retaliate now.
- At 14:30 GMT, Federal Reserve Bank of Chicago President Austan Goolsbee participates in a moderated Q&A at the Association for Business Journalists 2024 SABEW Annual Conference in Chicago.
- Surprise comments from European Central Bank (ECB) member Edward Scicluna, who said that the ECB should even consider a 50 basis point cut at its next meeting as inflation is set to undershoot 2%.
- Equity markets are not doing well on the back of the escalation in the Middle East and trade in the red across the board. However, European and US equity futures are off their lows in the first part of European trading hours.
- According to the CME Group’s FedWatch Tool, expectations are further cementing a no-change to the Fed’s monetary policy in June.
- The benchmark 10-year US Treasury Note trades around 4.59%, rather stable after a brief surge to 4.63% earlier on Friday.
US Dollar Index Technical Analysis: Back to macro
The US Dollar Index (DXY) might be facing some selling pressure despite the current tensions escalating in the Middle East. This sounds contradictory but makes sense, seeing that bond prices are jumping higher, pushing yields lower and both the Japanese Yen and the Swiss Franc outpacing the Greenback in terms of inflows in the race to safe havens. This paints a very mixed picture, and with markets already having priced in the events from this morning, the US Dollar could be set to ease a touch, with the DXY possibly briefly sliding back below 106.00 by the close on Friday.
On the upside, the fresh Tuesday’s high at 106.52 is the level to beat. 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, the first important level is 105.88, a pivotal level since March 2023. Further down, 105.12 and 104.60 should also act as support ahead of the region with both the 55-day and the 200-day Simple Moving Averages (SMAs) at 104.17 and 103.91, respectively.
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.