US Dollar tallied another losing session, weakened by the Fed's dovish stance
|- The DXY Index hovers around 101.90, presenting its lowest level since August.
- Despite positive Retail Sales Figures from November, the US Dollar continues to weaken.
- The Greenback is suffering the aftermath of Wednesday’s Fed announcement.
- The yield on the 2-year US bond declined to its lowest since June.
The US Dollar (USD) declined to 101.80, its weakest position since August. The Federal Reserve's (Fed) unexpected hint at three rate cuts for 2024 weighs heavily on US Treasury yields and the Greenback.
In the last meeting of the Fed in 2023, the bank welcomed cooling inflation figures, and the revised Dot Plot suggests Fed governors aren't seeing any rate hike in 2024. Additionally, they forecasted 75 basis points of easing. This means that the market expectations are aligning with the bank's stance, which is cheered by markets as it fuels risk-on flows.
Daily Market Movers: US Dollar loses ground, despite positive Retail Sales figures, US yields in multi-month lows
- The Fed hinted at a triad of rate cuts expected for 2024, which applied pressure on the US dollar.
- The November Retail Sales report by the US Census Bureau indicated a 4.1% (YoY) increase, a stronger performance than the 2.2% increase of the previous month.
- The US Department of Labor reported Initial Jobless Claims for the week ending on December 9 at 202K, slipping beneath the 220K consensus and previous 221K figures, signaling an unexpectedly healthy job market.
- Currently, US bond yields are decreasing, with rates at 4.35% for the 2-year yield, 3.87% for the 5-year yield, and 3.91% for the 10-year yield.
- The CME FedWatch Tool projections suggest that markets foresee rate cuts as early as March 2024.
Technical Analysis: DXY Index bears take the lead, indicators dive to negative zone
The Moving Average Convergence Divergence (MACD) histogram shows rising red bars, a signal typically associated with bearish momentum, while the Relative Strength Index (RSI) is nearing oversold conditions, adding further confirmation that the bears command price movement.
Furthermore, examining the Simple Moving Averages (SMAs), the index is positioned below the 20, 100 and 200-day SMAs, indicating a dominant bearish bias in the larger context. This suggests that despite the oversold RSI hinting at temporary relief, the overall selling pressure remains strong, and the bears continue to dictate the price action.
Support levels: 101.50, 101.30, 101.00.
Resistance levels: 103.45 (20 and 200-day SMA bearish crossover), 104.50 (100-day SMA), 104.70.
Risk sentiment FAQs
What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and 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 of bringing a return, even if it is relatively modest.
What are the key assets to track to understand risk sentiment dynamics?
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
Which currencies strengthen when sentiment is "risk-on"?
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
Which currencies strengthen when sentiment is "risk-off"?
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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