- The US Dollar crushes competition in foreign currencies and trades up across the board.
- The Trump trade is driving the Greenback higher while a goldilocks scenario comes in play.
- The US Dollar index slices through a difficult level of resistances.
The US Dollar (USD) sets forth its rally on Tuesday as the Trump trade adds another wave of US Dollar buying. The Greenback is crushing markets, steamrolling across the quote board against other major currencies. A goldilocks momentum is taking place with the US Federal Reserve (Fed) sticking to its interest-rate cutting cycle, while the rollout plan from President-elect Donald Trump is favouring equities due to prospects of stimulus and tax reduction packages once Trump takes office.
The US economic calendar is rather empty this Tuesday in terms of data, with the numbers from the National Federation of Independent Business (NFIB) and from the TechnoMetrica Institute of Policy and Politics. Markets will rather focus on the batch of Fed speakers who will be speaking this Tuesday. After Fed Chairman Jerome Powell vowed that the Fed will remain data-dependent, a continuation of the rate-cutting cycle could fuel the current Trump trade rally in equities and the US Dollar even more.
Daily digest market movers: Fed speakers to dampen hope?
- The National Federation of Independent Business (NFIB) Optimism index, which gauges sentiment among US small and medium-sized firms, came in at 93.7 in October, up from 91.5 a month earlier and beating market expectations.
- The TechnoMetrica Institute of Policy and Politics will release its Economic Optimism data for November around 15:00 GMT. A similar pattern as with the NFIB number is expected, ticking up to 47.3, from 46.9.
- Four Fed speakers are set to release comments to the markets:
- At 15:00 GMT, Federal Reserve Governor Christopher Waller delivers a keynote speech at the Clearing House Annual Conference in New York.
- Around 15:15 GMT, Federal Reserve Bank of Richmond Thomas Barkin delivers a speech and participates in a moderated Q&A session at the Together Summit in Baltimore.
- At 19:00 GMT, Federal Reserve Bank of Minneapolis President Neel Kashkari participates in a moderated conversation on “The Fed’s New Focus” at the Yahoo Finance Invest event in New York.
- Finishing off this Tuesday at 22:00 GMT, Federal Reserve Bank of Philadelphia Patrick Harker delivers a speech about Fintech, AI & the Changing Financial Landscape at the Carnegie Mellon University Lecture Series.
- Equities are giving back Monday’s gains, with European indices sinking near 1%. US Futures look bleak ahead of the US Opening bell.
- The CME FedWatch Tool is pricing in another 25 basis points (bps) rate cut by the Fed at the December 18 meeting by 68.8%. A smaller 31.2% chance is for rates to remain unchanged. While the rate-cut scenario is the most probable, traders have pare back some of the rate-cut bets compared with a week ago.
- The US 10-year benchmark rate trades at 4.36%, up sharply after the bank holiday on Monday.
US Dollar Index Technical Analysis: Watch out for the curb
The US Dollar Index (DXY) is being fueled by the Trump trade, which is steamrolling through markets for a second day in a row. There is even a Goldilocks scenario on the table where the Fed is still cutting while markets are cheering ahead of President-elect Donald Trump taking office. A small caveat here might be that markets will have priced in everything too quickly before President-elect Trump is able to issue any measure at all.
This Tuesday, the rather heavy 105.89 (May 2 high) is being tested as resistance. Once that level is broken, 106.52, the high of April and a double top, will be the last level standing before starting to talk about 107.00.
On the downside, the round level of 104.00 and the 200-day Simple Moving Average (SMA) at 103.87 should refrain from sending the DXY any lower. Before that level, there is not much in the way with maybe some slim support at 104.63 (high of October 30).
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.