- The US Dollar steadies on Monday after a steep 1.76% sell-off last week, the worst in more than a year.
- Fed Chairman Jerome Powell committed to a September interest-rate cut in its Jackson Hole speech.
- The US Dollar index trades above 100.00 with US data underway this week.
The US Dollar (USD) is trading broadly flat on Monday after printing one of its worst weekly performances since June 2023. The US Dollar Index – which weighs the value of the US Dollar against a bucket of other currencies – shed 1.75% last week, with the latter part of those losses driven by US Federal Reserve (Fed) Chairman Jerome Powell’s words in Jackson Hole. Now that Powell has committed to a rate cut in September, markets could start to speculate over what this means for the Fed’s meeting in November and further down the line.
Concerns could already start to pick up on Monday as the economic calendar features the often market-moving Durable Goods Orders numbers. Should overall US data remain resilient or even pick up pace, what would it mean for the Fed’s commitment to cut in September? Strong data could bring the scenario of a one-and-done rate cut, which would be taken by markets as a very cold shower.
Daily digest market movers: Left in the dark
- Tensions grew over the weekend between Israel and Hezbollah with several attacks from both sides.
- The United Kingdom is on a bank holiday this Monday, which means reduced flows during the European trading session.
- In the US economic calendar, the Durable Goods Orders data for July are due to come out at 12:30 GMT:
- Headline Durable Goods Orders are expected to rebound to a 4% increase from the 6.7% plunge seen a month earlier
- Durable Goods without Transportation are expected to be unchanged following the prior month’s 0.4% increase..
- Revisions to the previous month’s data could be more market-moving than the actual number.
- Equities are softening into the Monday session with European equities marginally lower while US futures ares starting to tick up.
- The CME Fedwatch Tool shows a 61.5% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 38.5% chance for a 50 bps cut. Another 25 bps cut (if September is a 25 bps cut) is expected in November by 36.3%, while there is a 47.9% chance that rates will be 75 bps (25 bps + 50 bps) below the current levels and a 15.8% probability of rates being 100 (25 bps + 75 bps) basis points lower.
- The US 10-year benchmark rate trades at 3.81%, and ticks up from a fresh three-week low earlier.
Economic Indicator
Durable Goods Orders
The Durable Goods Orders, released by the US Census Bureau, measures the cost of orders received by manufacturers for durable goods, which means goods planned to last for three years or more, such as motor vehicles and appliances. As those durable products often involve large investments they are sensitive to the US economic situation. The final figure shows the state of US production activity. Generally speaking, a high reading is bullish for the USD.
Next release: Mon Aug 26, 2024 12:30
Frequency: Monthly
Consensus: 4%
Previous: -6.6%
Source: US Census Bureau
US Dollar Index Technical Analysis: Truly data driven from now on
The US Dollar Index (DXY) saw a substantial move lower last week, snapping several important support levels, as markets are pricing in aggressive rate cuts by November. Expectations could be going too far, as the Fed appears unlikely to start cutting by 50 bps or more in the current scenario of a soft landing for the US economy.
For a recovery, the DXY faces a long road ahead. First, 101.90 is the level to reclaim. A steep 2% uprising would be needed to get the index to 103.18 from the current 101.00. A very heavy resistance level near 104.00 not only holds a pivotal technical value, but it also bears the 200-day Simple Moving Average (SMA) as the second heavyweight to cap price action.
On the downside, 100.62 (the low from December 28) tries to hold support, although it looks rather feeble. 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.