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US Dollar rises modestly ahead of CPI and Fed decision

  • The US dollar adds to Monday’s gains.
  • The Dollar jumps after rumors that French President Emmanuel Macron was considering resigning.
  • The US Dollar Index is trading just above 105.00 and flirting with nearby support levels.

The US Dollar (USD) is trading higher, above 105.00 on Tuesday, and is unlikely to make any big moves in the coming hours unless something crucial happens. Despite its gains on Monday, after French President Emmanuel Macron called early elections in June, the impact of the event is being mitigated with Marine Le Pen, leader of the far-right movement in France, not participating in them. Although the DXY rally received another boost with the headline that President Macron was not considering resigning, which markets are now interpreting as him actually considering resigning, adding to more Euro weakness and US Dollar strength.

On the economic front, the US Dollar Index (DXY) moves in tandem with political news from Europe ahead of Wednesday’s main events: the US Consumer Price Index for May and the interest rate decision. interest of the Federal Reserve (Fed). Before that, two very light data items will hit the markets on Tuesday: the NFIB Business Optimism Index for May and the Redbook Index for the first week of June.

Daily Market Drivers Summary: Wake Me Up When Wednesday Starts

  • The headline coming Tuesday comes from France, where Marine Le Pen, leader of the far-right movement, said she will not participate in the upcoming snap elections at the end of June. This can be considered a victory for current French President Emmanuel Macron, as his government sees its chances of surviving these snap elections increase with Le Pen now stepping down.
  • Around 10:00 GMT a strange headline emerged on all the big news agencies from a person close to French President Macron, commenting that the president did not consider resigning after the election results. This comment triggered another drop in the Euro against its peers, and resulted in a rally in the US Dollar, with markets interpreting this headline as ‘where there is smoke, there is fire’, presuming that the French president had considered resigning on Sunday.
  • The Eurozone is also buckling under pressure, with a bond sell-off in the region. The spread between Italian and German bonds is widening with Italian yields rising faster than German ones. Widening eurozone yield spreads are often seen as stress and a negative signal in global markets.
  • At 10:00 GMT, the National Federation of Independent Business (NFIB) has published its business optimism index for May. The result exceeded expectations and the previous figure of 89.8, with 90.5 as the number for May.
  • At 12:55 GMT, the Redbook Index for the week ending June 7 will be published. The previous reading was 5.8%, and there is no forecast available.
  • US Treasury ready to release some debt into markets
  • 52-week bill auction scheduled for 15:30 GMT.
  • The 10-year note auction will be allocated at 17:00 GMT.
  • Stocks are getting worse with all European stocks down due to widening spreads between Eurozone countries and that comment about French President Macron not considering resigning. All European stocks down 1%, US futures down a quarter of a percentage point.
  • The CME’s FedWatch tool shows a 45.6% probability that the Federal Reserve (Fed) interest rate will remain at the current level in September. The odds of a 25 basis point rate cut stand at 50%, while a very low probability of 4.4% is priced at a 50 basis point rate cut.
  • The 10-year US Treasury yield falls to this week’s lowest level, near 4.43%, and flirts with further declines.

DXY Dollar Index Technical Analysis: Europe is in trouble

The US Dollar Index (DXY) could be summed up with one word on Tuesday: Yawn! No big moves are expected, with markets remaining on the sidelines ahead of this week’s major US events on Wednesday.

On the positive side, there are some technical or crucial levels to keep in mind. The first is 105.52, a level that held support for most of April. The next level to watch is 105.88, which caused a rejection in early May and will likely act as resistance again. Higher up, the biggest challenge remains 106.51, the year-to-date high from April 16.

On the downside, a trifecta of simple moving averages now acts as support. First, and very close, is the 55-day SMA at 105.05. A little further down, near 104.47, both the 100-day and 200-day SMA form a double layer of protection to withstand any decline in the US Dollar Index. If this area breaks, 104.00 is the level to save the situation.

The banking crisis

The March 2023 banking crisis occurred when three US-based banks with heavy exposure to the technology sector and cryptocurrencies suffered a spike in withdrawals that revealed serious weaknesses in their balance sheets, resulting in their insolvency.
The most high-profile bank was California-based Silicon Valley Bank (SVB), which saw a spike in withdrawal requests due to a combination of clients fearing the fallout from the FTX debacle as substantially higher returns were being offered. higher elsewhere.

In order to make the repayments, the Silicon Valley Bank had to sell its holdings of Treasury bonds, mainly from the US. However, due to the increase in interest rates caused by the rapid tightening measures of the Federal Reserve, the Treasury bonds had decreased substantially. The news that SVB had suffered a $1.8 billion loss on the sale of its bonds sparked panic and precipitated a full-scale run on the bank that ended with the Federal Deposit Insurance Corporation (FDIC) having to take over. of the same. The crisis spread to First Republic, based in San Francisco, which ended up being rescued thanks to a coordinated effort by a group of large American banks. On March 19, Credit Suisse in Switzerland went bankrupt after several years of poor results and had to be absorbed by USB.

The banking crisis was negative for the US Dollar (USD) because it changed expectations about the future course of interest rates. Before the crisis, investors expected the Federal Reserve (Fed) to continue raising interest rates to combat persistently high inflation; However, once it became clear how much pressure this was putting on the banking sector by devaluing bank holdings of US Treasuries, the expectation was that the Federal Reserve would pause or even reverse its policy trajectory. Since higher interest rates are positive for the US dollar, it fell as the possibility of a shift in monetary policy was ruled out.

The banking crisis was a bullish event for the price of Gold. Firstly, it benefited from demand due to its status as a safe haven asset. Second, it led investors to expect that the Federal Reserve (Fed) would pause its aggressive policy of rate hikes, fearing the impact on the financial stability of the banking system: expectations of lower interest rates reduced the opportunity cost of holding Gold. Third, Gold, which is traded in US Dollars (XAU/USD), rose in value because the US Dollar weakened.

Source: Fx Street

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