Market Data 
- The US Dollar extends further gains in the European session on Monday.
- Comments from Fed’s Waller and the mixed Nonfarm Payrolls print are enough to fuel a stronger US Dollar for now.
- The US Dollar Index pops above 101.50 and looks to be heading towards 101.90 for a test.
The US Dollar (USD) edges higher on Monday and extends gains for a second consecutive day after US Federal Reserve (Fed) Governor Christopher Waller did not convince markets that the September interest rate cut will be a 50 basis point one. Instead, with the mixed Nonfarm Payrolls release on Friday, markets look to settle for only a 25 basis point rate cut, which means that the Greenback has been punished too much in recent weeks and needs to gain a bit to get the right valuation.
On the economic data front, this week has three pivotal points. For the US side, the US Consumer Price Index (CPI) for August release on Wednesday will be the main driver. On the European side, the European Central Bank will deliver its interest rate decision on Thursday, ahead of the Fed’s rate decision next week. Meanwhile, the US presidential election will step to the forefront again with a debate between former US President Donald Trump and Democratic candidate Kamala Harris on Wednesday.
Daily digest market movers: Setting forth Friday’s move
- At 14:00 GMT, the US Census Bureau will release the US Wholesale Inventories for July, expected to come in at 0.3%.
- The US Treasury will auction some short-term paper at 15:30 GMT, with a 3-month and a 6-month bill auction.
- At 19:00 GMT, the Consumer Credit Change for July is expected to jump to $12.2 billion from $8.93 billion prior.
- Equities in Asia have closed down again by on average 1%. European and US equities are rather chosing positive numbers with nearly all major European indices and US futures up by 1%.
- The CME Fedwatch Tool shows a 73.0% chance of a 25 basis points (bps) interest rate cut by the Fed on September 18 against a 27.0% chance for a 50 bps cut. For the meeting on November 7, another 25 bps cut (if September is a 25 bps cut) is expected in November by 32.6%, while there is a 52.5% chance that rates will be 75 bps (25 bps + 50 bps) and a 14.9% probability of rates being 100 (25 bps + 75 bps) basis points lower.
- The US 10-year benchmark rate trades at 3.74%, gradually trading higher on the day.
US Dollar Index Technical Analysis: Where is the fair value
The US Dollar Index (DXY) is looking for its fair value after markets devalued the Greenback a bit too far in the assumption that the Fed would have to cut bigger and quicker than the US data is actually suggesting. That repricing looks to be on its way with a stronger US Dollar this Monday and leaves a fair warning for traders and markets. The Fed determines each policy meeting on the data coming in, which means each meeting might not be what markets expect it to be.
Looking at key technical levels, the first resistance at 101.90 is getting ready for a second test after its rejection last week. Further up, a steep 2% uprising would be needed to get the index to 103.18. The next tranche up is a very misty one with the 55-day Simple Moving Average (SMA) at 103.40, followed by the 200-day SMA at 103.89, just ahead of the big 104.00 round level.
On the downside, 100.62 (the low from December 28) holds strong and has already made the DXY bounce four times in recent weeks. Should it break, the low from July 14, 2023, at 99.58, will be the ultimate level to look out for. Once that level gives way, early levels from 2023 are coming in near 97.73.
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.
