US Dollar extends correction despite risk-off environment

Source Fxstreet
  • The US Dollar trades slightly lower against major peers at the start of the European session. 
  • Two Fed speakers are scheduled on  Tuesday. 
  • The US Dollar index trades near the weekly low, though still well above 105.00. 

The US Dollar (USD) trades slightly lower against major pairs during the Tuesday European session despite the risk-off mood, with Nvidia becoming the biggest worry for markets after being the golden boy for many weeks in a row. Meanwhile, in Europe, headaches emerge as well ahead of the French snap election’s first round on Sunday. 

On the economic front, Tuesday’s calendar includes some housing numbers, the Chicago Fed National Activity Index, the Richmond Fed Manufacturing Index, and the US Conference Board Consumer Confidence as main elements. Additionally, two US Federal Reserve (Fed) members will take the stage and might comment on the current monetary policy stance. One element to highlight as well on the agenda is the first presidential debate on Thursday between current US President Joe Biden and former US President Donald Trump. 

Daily digest market movers: US equities on the front foot

  • At 12:30 GMT, the Chicago Fed National Activity Index for May will be released. The previous number was at -0.23, with no forecast available.
  • At 13:00 GMT, the Housing Price Index for April will be released. An uptick of 0.3% is expected after rising by 0.1% in March.
  • The Conference Board Consumer Confidence and the Richmond Fed Manufacturing Index for June will both be released at 14:00 GMT. Consumer Confidence is expected to ease to 100.00 after reaching 102.00 in May. The Richmond Manufacturing Index is expected to rise to 2 in June after the previous reading of 0. 
  • Two US Federal Reserve officials will make their way to the stage:
    • At 11:00 GMT, Federal Reserve Governor Michelle Bowman delivered a speech about the US monetary policy and bank capital reform at the Policy Exchange UK event in London, United Kingdom. She remained very hawkish by saying hikes are still on the table if needed, and there are still too many risks for upside surprises in inflation. 
    • At 16:00 GMT, Federal Reserve Governor Lisa Cook delivers a speech about the US economic outlook in a luncheon at the Economic Club of New York.
    • To round up the day, at 18:10 GMT, Bowman delivers pre-recorded opening remarks at the Midwest Cyber Workshop hosted by the Federal Reserve Bank of St. Louis, Chicago, and Kansas City.
  • European equities are diving lower, with the major German Dax sinking over 1%. US futures are flat and do not follow the negative sentiment. 
  • The CME Fedwatch Tool is backing a rate cut in September, with odds now standing at 61.1% for a 25 basis point cut. A rate pause stands at a 32.3% chance, while a 50-basis-point rate cut has a slim 6.6% possibility. 
  • The US 10-year benchmark rate trades at 4.24%, rather steady since the end of last week.  The spread between the French and German 10-years benchmark has fallen from 0.79% to 0.74% and is easing a touch, though still the highest level in over six years. 

US Dollar Index Technical Analysis: Risk-off helping to push back 

The US Dollar Index (DXY) is trading float on Tuesday, with some risk-off out of Europe supporting the Greenback. Expect not to see any big waves ahead of the US Opening Bell as markets are starting to struggle with how to price the possible outcome from the French snap elections on Sunday. Traders will also be looking for NVidia to see how it behaves and if it can end its recent correction. 

On the upside, the first level to watch is 105.88, which triggered a rejection at the start of May and on Friday last week. Further up, the biggest challenge remains at 106.52, the year-to-date high from April 16. A rally to 107.20, a level not seen since 2023, would need to be driven by a surprise uptick in the US inflation or a sudden hawkish shift from the Fed. 

On the downside, 105.52 is the first support ahead of a trifecta of Simple Moving Averages (SMA). First is the 55-day SMA at 105.23, safeguarding the 105.00 round figure. A touch lower, near 104.66 and 104.48, both the 100-day and the 200-day SMA form a double layer of protection to support any declines. Should this area be broken, look for 104.00 to salvage the situation. 

US Dollar FAQs

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.

 

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