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US Dollar loses ground after ADP numbers

  • The markets are marked by a lot of economic data and a stressful meeting of the Polish central bank.
  • This week, the focus will be on Friday’s US nonfarm payrolls.
  • Dollar Index breaks above 107 and hits 11-month highs.

He US dollar (USD) prepares for a very nervous day, while the US Dollar Index (DXY) is near the high of the last 48 weeks. Volatility will pick up as a lot of data will be released. More importantly, the Polish central bank will make its next interest rate decision on Wednesday, and it promises to be very eventful.

Traders saw ADP numbers drop substantially below 100,000. Although there is no proven correlation with Friday’s US Nonfarm Payrolls, there will be some bias towards them. Following the ADP figures, the Institute of Supply Management (ISM) will publish its service sector data for the month of September.

Daily Summary: US Dollar Volatility Spikes

  • At 11:00 GMT the Mortgage Bankers Association (MBA) has published the weekly mortgage application data for the end of September. The previous week there was a decrease of -1.3% and in the last week of September the decrease was even greater, -6.0%.
  • The change in ADP employment for September has been published, standing at 89,000, compared to the previously revised 180,000. Widely disappointing the expectations of 150,000.
  • Around 13:45 GMT, the S&P Global Purchasing Managers’ Index (PMI) will be published, both for the services sector and for the composite, for the month of September: The services PMI is expected to remain stable at 50.2 points. The composite will remain unchanged at 50.1.
  • At 14:00 GMT the ISM data for the month of September will arrive. The service sector employment index stood at 54.7 last time, without any forecast. The new orders index stood at 54.7 with no forecast forecast. The services PMI is expected to go from 54.5 to 53.6. The Prices Paid Index stood at 58.9, although no forecast was given.
  • In addition, at that time factory orders for August will be known, which will rise from -2.1% to 0.3%.
  • Watch for surprises in the forex market as the Central Bank of Poland (NBP) will issue its rate decision between 13:00 and 15:00 GMT. The previous meeting saw a surprise rate cut of 75 basis points and shook the currency market, causing substantial moves in several currency crosses.
  • Stocks throw in the towel again: Asian stocks are down more than 2% overall. European stocks are down more than 0.50%, as are US futures.
  • CME Group’s FedWatch tool shows that markets are pricing in a 71.2% chance that the Federal Reserve will keep interest rates unchanged at its November meeting. This figure is slightly lower than the 77.5% a week ago.
  • The 10-year US Treasury yield hits 4.83%, marking a new yearly high. The rate differential is once again the driving force of the US bond market.

Technical analysis of the Dollar Index: DXY hits the bottom

The US Dollar Index appears to have hit the pause button for a day, as traders prepare for a spike in volatility. The big batch of data will play a fundamental role. Additionally, the Relative Strength Index (RSI) is back in overbought territory, which could limit the DXY’s gains for the rest of the week.

The Dollar Index opened around 107.24, although the overheated relative strength index (RSI) is acting as a limiter now that it is trading in an overbought regime. With 107.19 – the November 30, 2022 high – being tested right now, it will be important to see if the DXY can get a daily close above that level. In that case, the next level to watch will be 109.30.

On the downside, the recent resistance at 105.88 should be considered the first support. However, that barrier has just been broken to the upside, so it is not likely to be strong. Instead, it is preferable to look for 105.12 to keep the DXY above 105.00.

Risk Sentiment FAQ

What do the terms “risk appetite” and “risk aversion” mean when referring to sentiment in financial markets?

In the world of financial jargon, the two terms “risk appetite” and “risk aversion” refer to the level of risk that investors are willing to bear during the reference period. In a market “risk appetite” , investors are optimistic about the future and are more willing to buy risky assets. In a “risk-free” market, investors start to “play it safe” because they are worried about the future and therefore buy assets less risky ones that are more likely to bring benefits, even if they are relatively modest.

What are the key assets to follow to understand risk sentiment dynamics?

Typically, during periods of “risk appetite”, stock markets rise, and most commodities – except gold – also appreciate as they benefit from positive growth prospects. The currencies of countries that are large exporters of raw materials strengthen due to increased demand, and Cryptocurrencies rise. In a “risk off” market, bonds – especially major government bonds – rise, Gold shines and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar benefit.

Which currencies strengthen when the sentiment is “risk appetite”?

The Australian dollar (AUD), the Canadian dollar (CAD), the New Zealand dollar (NZD) and minor currencies such as the ruble (RUB) and the South African rand (ZAR) tend to rise in markets where there is an “appetite for risk.” This is because the economies of these currencies rely heavily on commodity exports for their growth, and these tend to rise in price during periods of “risk appetite.” This is because investors anticipate higher demand for raw materials in the future due to increased economic activity.

Which currencies strengthen when sentiment is “risk averse”?

The major currencies that tend to rise during periods of “risk aversion” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The Dollar, because it is the world’s reserve currency and because in times of crisis investors buy US public debt, which is considered safe because it is unlikely that the world’s largest economy will go into default. The Yen, due to the increase in demand for Japanese government bonds, since a large proportion is in the hands of domestic investors who are unlikely to get rid of them, even in a crisis. The Swiss franc, because strict Swiss banking legislation offers investors greater capital protection.

Source: Fx Street

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