US Dollar holds on to gains with traders paring back rate cut bets

Source Fxstreet
May 17, 2024 10:45
  • The US Dollar was able to eke out gains on Thursday after the steep decline from Wednesday.
  • The Greenback edges further up ahead of a slew of Fed speakers taking the stage on Friday.
  • The US Dollar Index flirts with a jump back above 104.70 towards 105.00

The US Dollar (USD) is continuing its recovery on Friday for a second day in a row after the steep decline seen on Wednesday, which marked this week for the Greenback. Markets have priced in two interest-rate cuts for 2024 due to the lower Consumer Price Index (CPI) data for April released of this week. However, markets are not out of the woods just yet with rate cut expectations as several Federal Reserve (Fed) officials pushing back against enthusiasm, calling to put the cork back on the champagne bottle as rates might be staying higher for longer than expected. 

On the economic data front, it will be a very calm Friday with no real data points of importance available for the US Dollar to move on. Still, a fresh can of Fed speakers are lined up to speak, with Federal Reserve Bank of Minneapolis President Neel Kashkari making a second appearance this week. Federal Reserve Governor Christopher Waller is always good for a few market-moving comments, and right at the end of this Friday, Federal Reserve Bank of San Francisco President Mary Daly will wrap up the week. 

Daily digest market movers: Fed speakers have room to be vocal 

  • Friday’s economic calendar doesn’t include any data points for the US to be released.
  • Markets can digest all of this week’s data while a slew of Fed officials are set to close off the week:
    • At 14:15 GMT, Federal Reserve Bank of Minneapolis President Neel Kashkari will have opening remarks at the International Organization for Standardization Technical Committee 68 (ISO/TC 68) financial services plenary meeting.
    • Fed’s Kashkari will be followed by Federal Reserve Governor Christopher Waller, who will give a speech about payment innovation at the same stage. 
    • Near 16:15 GMT, Federal Reserve Bank of San Francisco President Mary Daly delivers a speech at the University of San Francisco School of Management commencement ceremony.
    • Fed’s Daly and Waller are both voting members of the Federal Open Market Committee (FOMC) this year. 
  • Equities trade very mixed this Friday. European main indices are on the back foot, while US futures are still struggling for direction. 
  • The CME Fedwatch Tool suggests a 91.3% probability that June will still see no change to the Federal Reserve's fed fund rate. Odds have changed for September, with the tool showing a 50.5% chance that rates will be 25 basis points lower than current levels.
  • The benchmark 10-year US Treasury Note trades around 4.36%, and recovers from the lowest level for this month at 4.34%.

US Dollar Index Technical Analysis: Dollar fade 

The US Dollar Index (DXY) is further building on its recovery with, for now, a second day of green on the screen. However, the substantial slide from Wednesday looks to be too big to overcome for this week and will likely result in a negative end closing this Friday evening for the DXY. 

The question is if the Greenback has enough reason to rally. Even though Fed officials are pushing back against upcoming interest-rate cuts, several economic data points this week from both leading and lagging indicators are starting to ease, which does not support the thesis that the US – its economy and its Dollar – is outperforming. 

On the upside, several levels need to be regained again after Wednesday’s firm correction. The first is the 55-day Simple Moving Average (SMA) at 104.68, together with a pivotal level at 104.60. The next step up will be 105.12 and 105.52. 

On the downside, the 100-day SMA around 104.11 is the last man standing to support the decline. Once that snaps, an air pocket is placed between 104.11 and 103.00. Should US Dollar outflows persist, the low of March at 102.35 and the low from January at 100.61 are levels to keep into consideration.  

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.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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