- US Dollar Weakens Further After Relatively Dovish Fed Minutes
- The focus will be across the Atlantic, with the UK heading into elections.
- The US Dollar Index rebounds from 105.00, although selling pressure increases.
The US Dollar (USD) continues its losing momentum for the third day in a row as American traders will not flock to the trading floor as US markets are closed due to Independence Day. However, there is a lot to digest after a tough day of US economic data on Wednesday, while several external events occur on Thursday. The main event unfolding towards the weekend will be the outcome of the UK election, where the end of the Tory party’s reign after 14 years in power is forecast.
On the US economic front, the economic calendar is empty, although as mentioned above, external data and headlines will drive the Dollar. German factory orders already came in at the lower end of expectations, declining by -1.6% in May. Moreover, Wednesday’s rather disappointing data will continue to weigh on the US Dollar, with limited upside potential expected for the Dollar.
Market Drivers Daily Roundup: UK Polls Open
- UK citizens are heading to the polls. Early results are not expected until the evening and early morning. However, exit polls and comments from key politicians could generate headlines in due course. Keeping an eye on Cable (GBP/USD) will be key for the rest of the week.
- The New York Times has reported that US President Joe Biden is considering withdrawing from the presidential race.
- The US Federal Reserve minutes delivered the same message that markets have heard in recent weeks: more data is needed to confirm that inflation is coming down. However, the Federal Open Market Committee (FOMC) is divided on how long rates should remain elevated.
- European stocks are slightly in the green, along with Asia, where Japan is leading the rally. U.S. futures are flat and face less trading volume than usual due to the public holiday.
- The CME Fedwatch tool broadly supports a September rate cut despite recent comments from Fed officials. The odds now stand at 67.3% for a 25 basis point cut. A rate pause has a 26.5% probability, while a 50 basis point rate cut has a slim 6.2% chance.
- The US 10-year Treasury bond yield is trading at 4.36%, near its weekly low. It should be noted that the US bond market is closed due to the public holiday.
DXY Dollar Index Technical Analysis: Weaker data does not support the DXY
The US Dollar Index (DXY) weakened quite a bit on Wednesday after a wave of softer US data sent the DXY down to 105.00. Fortunately, Dollar bulls quickly stepped in to save the day and push it back above the 55-day Simple Moving Average (SMA) at 105.32. However, selling pressure is building on that support with another test early on Thursday. Pressure could mount in the run-up to Friday when Non-Farm Payrolls could be the catalyst that pushes the DXY back to 104.75, which is the next key support.
On the upside, 105.53 and 105.89 are the first crucial levels nearby. Once there is a close above those levels, the red downtrend line on the chart around 106.23 and the April peak at 106.52 are the two main resistances before a fresh nine-month high. That would be reached once 107.35 is broken to the upside.
On the downside, the 55-day SMA at 105.22 safeguards the round figure of 105.00. A little lower, near 104.76 and 104.44, both the 100-day and 200-day SMA form a double layer of protection to withstand any decline along with the green ascending trend line from last December.
Dollar Index: Daily Chart
The feeling of risk
In the world of financial jargon, the two terms “risk-on” and “risk-off” refer to the level of risk that investors are willing to bear over the reference period. In a “risk-on” market, investors are optimistic about the future and are 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 to provide a return, even if relatively modest.
Typically, during periods of “risk appetite”, stock markets rise, and most commodities – except gold – also appreciate as they benefit from positive growth prospects. Currencies of countries that are major commodity exporters strengthen due to increased demand, and cryptocurrencies rise. In a “risk-off” market, bonds rise – especially major government bonds –, gold shines, and safe haven currencies such as the Japanese Yen, Swiss Franc and US Dollar benefit.
The Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD) and minor currencies such as the Ruble (RUB) and South African Rand (ZAR) tend to rise in markets where there is “risk appetite”. This is because the economies of these currencies are highly dependent on commodity exports for growth, and these tend to rise in price during periods of “risk appetite”. This is because investors anticipate higher demand for commodities in the future due to increased economic activity.
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 government debt, which is considered safe because the world’s largest economy is unlikely to default. The Yen, because of increased demand for Japanese government bonds, since a large proportion are held by domestic investors who are unlikely to part with them, even in a crisis. The Swiss Franc, because strict Swiss banking legislation offers investors greater capital protection.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
