- The US Dollar turns flat with US equities going for the positive tone.
- China markets are back online after the Golden Week closure, sparking a surge in volatility.
- The US Dollar Index trades above 102.00, and is looking for direction with a small fade still at hand.
The US Dollar (USD) is trying to brush off the small fade that tried to put pressure on the Greenback for a second day in a row after investors welcoming China back to the markets. It is not a warm welcome, with the Chinese Hang Seng 300 Index down over 9% at its closing bell. A surge in risk-off is taking place, with European stocks on the backfoot as well.
The economic calendar is light and should not create big waves on Tuesday, with the Goods Trade Balance and the Economic Optimism Index not expected to be market movers. Comments from Federal Reserve Bank of Atlanta President Raphael Bostic and Federal Reserve Vice Chair Phillip Jefferson, however, could be.
Daily digest market movers: Concerns are abaiting at the US opening bell
- China has reopened again after a week of festivities for the Golden Week. The festive mode has rather quickly dampened, with the Hang Seng Index correcting near 10% at its closing bell. The negative reaction spilled over into European markets and some risk-off across the board.
- At 10:00 GMT, the National Federation of Independent Business (NFIB) released its Business Optimism Index for September, which raised to 91.5 from 91.2 in August, falling short of economist expectations of 91.7.
- The Goods and Services Trade Balance data from August revealed a larger than expected recovery in the deficit. The Actual number came in at $-70.4 billion against the previous deficit of $-78.8 billion and better than the expected $-70.6 billion estimate.
- The TechnoMetrica Institute of Policy and Politics will release at 14:00 GMT the Economic Optimism Index for October. A small uptick to 47.2 is expected, coming from 46.1, though indicating ongoing consumer pessimism.
- At 16:45 GMT, Federal Reserve Bank of Atlanta President Raphael Bostic (2024 FOMC voting member) speaks about the US economic outlook at the Atlanta Consular Corps luncheon. At 22:30 GMT, Federal Reserve Vice Chair Phillip Jefferson (2024 FOMC voting member) delivers a speech at an event organized by the Davidson College in Davidson, North Carolina.
- European equities are off their lows, though still trading in red, while US equities are gearing up to start the US trading session in green.
- The CME Fedwatch Tool shows an 88.7% chance of a 25 basis point (bps) interest rate cut at the next Fed meeting on November 7, while 11.3% is pricing in no rate cut. Chances for a 50 bps rate cut have been fully priced out now.
- The US 10-year benchmark rate trades at 4.05%, the highest level since mid-August.
US Dollar Index Technical Analysis: Already done
The US Dollar Index (DXY) is easing a touch for the second day in a row. The sharp rally from last week is seeing some profit-taking for the second day in a row. The fact that the US Dollar can not gain further even with the risk-off tone from Asia could mean that a short squeeze has been completed and might see a slow grind lower from here.
The psychological 103.00 is the first level to tackle on the upside. Further up, the chart identifies 103.18 as the very final level for this week. Once above there, a very choppy area emerges, with the 100-day Simple Moving Average (SMA) at 103.32, the 200-day SMA at 103.76, and the pivotal 103.99-104.00 levels in play.
On the downside, the 55-day SMA at 101.99 is the first line of defence, backed by the 102.00 round level and the pivotal 101.90 as support to catch any bearish pressure and trigger a bounce. If that level does not work out, 100.62 also acts as support. Further down, a test of the year-to-date low of 100.16 should take place before more downside. Finally, and that means giving up the big 100.00 level, the July 14, 2023, low at 99.58 comes into play.
US Dollar Index: Daily Chart
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
