- The US Dollar turns green on Monday ahead of Big Tech earnings
- Tensions in the Middle East ease, triggering a rally in equities.
- The US Dollar Index holds onto recent gains around 106.00, but downside pressure is mounting.
The US Dollar trades broadly steady on Monday, with markets having a sigh of relief after the weekend remained fairly calm as there was no further retaliation from Iran towards Israel. The de-escalation provides fuel to risk assets, particularly equities, to rally higher this Monday. With the risk-on tone, the Greenback might have some further room to ease.
On the economic data front, Monday’s calendar is very thin ahead of the US Gross Domestic Product (GDP) release on Thursday and the US Personal Consumption Expenditures Price Index (PCE) numbers on Friday. The latter is the most important for this week as the PCE is the Federal Reserve’s preferred inflation gauge and another red hot print might lead markets to price in a rate hike before considering any cuts.
Daily digest market movers: US data continous with a beat
- The Chicago Fed National Activity Index for March jumped up from a revised 0.09 in February to 0.15, beating the 0.07 survey penciled in.
- The US Treasury is auctioning a 3-month and a 6-month bill at 15:30 GMT.
- In the commodity space, both Oil and Gas futures are falling as the tensions in the Middle East ease.
- Equity markets are taking over the positive tone from Asia, with both European and US indices in the green ahead of Big Tech Earnings this week.
- According to the CME Group’s FedWatch Tool, expectations are further cementing for a no-change to the Fed’s monetary policy in June, with a small 17% chance for a rate cut.
- The benchmark 10-year US Treasury Note trades around 4.64%, recovering further after its decline on Friday to 4.50%.
US Dollar Index Technical Analysis: Soon markets will let go
The US Dollar Index (DXY) is facing a little bit of selling pressure at the start of this week. More and more traders are trying to sell the peak in the DXY, with the idea that the Greenback could fall back to lower levels seen in the first three months of this year near 104.00-105.00. With the PCE inflation numbers right at the end of this week, some easing might be taking place until PCE could trigger a turnaround if there is an upbeat surprise.
On the upside, the fresh Tuesday’s high from last week 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 with the peaks from November 2023 and recent support as drivers) . Further down, 105.12 and 104.60 should also act as support ahead of the region with the 55-day and the 200-day Simple Moving Averages (SMAs) at 104.17 and 103.91, respectively.
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.
