US Dollar trades flat with TIPP economic optimism retreating
- The US Dollar trades in the green though starts to ease again at the start of the US session.
- Traders are sending Greenback higher on a mixture of geopolitical fears and positive earnings.
- The US Dollar Index trades back above 105.00 after bulls were able to close in positive on Monday.
The US Dollar (USD) trades flat with the US trading session coming online for this Tuesday, and again easing the Greenback as seen on Monday in a similar pattern. Markets were pricing in again some risk premium as Israel looks set to start its ground invasion in Rafah, and Egypt has chored up its border control at its northern border with Gaza. Meanwhile substantial easing in the Australian Dollar (AUD/USD) and Japanese Yen (USD/JPY) added to support for the Greenback, though those gains are starting to ease as well with New York opening up.
On Tuesday, the US Redbook Index and the Economic Optimism measured by the TechnoMetrica Institute of Policy and Politics are the two main economic data points to be released. In this week’s rather packed US Federal Reserve (Fed) speakers’ agenda, only Federal Reserve Bank of Minneapolis President Neel Kashkari is set to speak. Meanwhile, traders can digest the release of the Senior Loan Officer Opinion Survey (SLOOS) for the first quarter, which pointed out on Monday that tightened lending standards are still the norm while consumer delinquencies are picking up.
Daily digest market movers: Optimism fades
- The United Kingdom was closed for a bank holiday on Monday and could see some catching up across several asset classes with London reopening on Tuesday.
- At 12:55 GMT, the Redbook Index for the week ending on May 3 came in at 6% from 5.5%.
- At 14:00 GMT, the TechnoMetrica Institute of Policy and Politics has released its Economic Optimism Survey for May. A decline from 43.2 to 41.8 was the outcome, missing the estimate from 44.1.
- Federal Reserve Bank of Minneapolis President Neel Kashkari will speak at around 15:30 GMT in a conversation at the Milken Institute 2024 Global Conference in Beverly Hills, California. Although Kashkari is a non-voter member this year, his comments have been market movers for the past few months.
- The US Department of the Treasury is set to auction 3-year Notes at 17:00 GMT.
- Finally, at 19:00 GMT, the Consumer Credit Change for March is set to be released. A further increase is expected to $15 billion from the $14.12 billion in the previous month.
- Japan is also back to open for business after a bank holiday. Overall, the positive close from the US equities overnight has spilt over into the Asian-Pacific session and is even rippling through into the European trading session, with green numbers across the board in all major indices.
- 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 of a rate cut in July are also out of the cards, while for September the tool shows a 49.7% chance that rates will be 25 basis points lower than current levels.
- The benchmark 10-year US Treasury Note trades around 4.47%, in the middle of Monday’s range.
US Dollar Index Technical Analysis: Is the tide turning?
The US Dollar Index (DXY) ticks up on Tuesday after Dollar bulls were able to close above 105.00 on Monday after a correction move in recent days. This could be crucial for the rest of the week and could see the DXY tick up further from here. Although no real major known catalysts are foreseen for this week, a recovery back to 106.00 could be plausible if USD/JPY rallies further towards 157.00
On the upside, 105.52 (a pivotal level since April 11) needs to be recovered through a daily close above this level before targeting the April 16 high at 106.52 for a third time. Further up and above the 107.00 round level, the DXY index could meet resistance at 107.35, the October 3 high.
On the downside, the 55-day and the 200-day Simple Moving Averages (SMAs) at 104.54 and 104.25, respectively, should provide ample support. If those levels are unable to hold, the 100-day SMA near 103.89 is the next best candidate.
Banking crisis FAQs
The Banking Crisis of March 2023 occurred when three US-based banks with heavy exposure to the tech-sector and crypto suffered a spike in withdrawals that revealed severe weaknesses in their balance sheets, resulting in their insolvency. The most high profile of the banks was California-based Silicon Valley Bank (SVB) which experienced a surge in withdrawal requests due to a combination of customers fearing fallout from the FTX debacle, and substantially higher returns being offered elsewhere.
In order to fulfill the redemptions, Silicon Valley Bank had to sell its holdings of predominantly US Treasury bonds. Due to the rise in interest rates caused by the Federal Reserve’s rapid tightening measures, however, Treasury bonds had substantially fallen in value. The news that SVB had taken a $1.8B loss from the sale of its bonds triggered a panic and precipitated a full scale run on the bank that ended with the Federal Deposit Insurance Corporation (FDIC) having to take it over.The crisis spread to San-Francisco-based First Republic which ended up being rescued by a coordinated effort from a group of large US banks. On March 19, Credit Suisse in Switzerland fell foul after several years of poor performance and had to be taken over by UBS.
The Banking Crisis was negative for the US Dollar (USD) because it changed expectations about the future course of interest rates. Prior to the crisis investors had expected the Federal Reserve (Fed) to continue raising interest rates to combat persistently high inflation, however, once it became clear how much stress this was placing on the banking sector by devaluing bank holdings of US Treasury bonds, the expectation was the Fed would pause or even reverse its policy trajectory. Since higher interest rates are positive for the US Dollar, it fell as it discounted the possibility of a policy pivot.
The Banking Crisis was a bullish event for Gold. Firstly it benefited from demand due to its status as a safe-haven asset. Secondly, it led to investors expecting the Federal Reserve (Fed) to pause its aggressive rate-hiking policy, out of fear of the impact on the financial stability of the banking system – lower interest rate expectations reduced the opportunity cost of holding Gold. Thirdly, Gold, which is priced in US Dollars (XAU/USD), rose in value because the US Dollar weakened.