US Dollar under siege ahead of Fed Minutes

  • The US Dollar turns red for Wednesday ahead of US opening bell and Fed Minutes release. 
  • Markets are suddenly opening up for a possible rate hike by the Fed in the next three months.  
  • The US Dollar Index trades back above 104 and is salvaging the weakness from Tuesday. 

The US Dollar (USD) is in the red and flirts again with a break below 104 in the US Dollar Index (DXY). Although the US Dollar was stronger earlier in the European trading session, pressure is on with the EU issuing a new bloc of sanctions that includes Chinese and Indian companies who allegedly are delivering materials to Russia to stock and produce weaponry. Meanwhile US Fed's Barkin has dampened the mood for a quick rate cut again by saying that Services inflation has not moved and is vital to come down before the Fed can even consider starting to cut.   

On the economic data front, traders are bracing for the release of the Fed Minutes later this evening. Together with the report of the Wall Street Journal it shows how fragile the market is currently pricing in any possibility whatsoever when it comes to rate policies. Traders will be even more looking for clues in the Minutes on whether the Fed will cut ahead of the summer, over the summer, or will not cut at all and might even hike. 

Daily digest market movers: EU sanctions underway by Friday

  • The EU is delivering fresh sanctions to Russia on Friday, with included several Chinese and Indian companies who are seen providing support to Russia for its weaponry production. 
  • An article from the Wall Street Journal’s Marketwatch is pointing to a small possibility of a rate hike in the coming three months. This probability is not seen in the US Chicago Mercantile Exchange Fed fund futures, but is showing up in options tied to the Secured Overnight Financing Rate.
  • The weekly Mortgage Bankers Applications (MBA) Index sinks further from last week -2.3% to -10.6%.
  • Near 13:55 the delayed Redbook Index has been released and jumped from 2.5% to 3%.
  • Richmond Fed member Charles Barkin made some comments this Wednesday, souring the mood further. Barkin sees firms still raising prices until consumers will finally push back, and even with goods deflating, services are still too high in order to return to normal inflation levels. 
  • The US Treasury Department is heading back to markets for a 20-year bond auction near 18:00. 
  • THe US Federal Reserve is due to release the Minutes from its latest meeting, near 19:00. 
  • Ahead of those Minutes, US Atlanta Fed President Raphael Bostic is due to speak near 13:00, followed by Federal Reserve governor Michelle Bowman around 18:00. 
  • Equities are very dispersed with China being the biggest winner this Wednesday. Both the Hang Seng and the Shenzhen Index are up over 1% on the day. European equities are dragging lower with the British FTSE100 down near 1%. US equity futures before the US opening bell are trading in the red. 
  • The CME Group’s FedWatch Tool is now looking at the March 20th meeting. Expectations for a pause are 93.5% and 6.5% for a rate cut. 
  • The benchmark 10-year US Treasury Note trades around 4.28%, a touch softer than Tuesday when the bond market opened for this week. 

US Dollar Index Technical Analysis: Fed Minutes to shake markets

The US Dollar Index (DXY) was clawing back earlier this Wednesday in European trading, though the mood is turning to the opposite side into the US opening bell. An earlier Wall Street Journal article alluding to a possible Fed rate hike in the coming three monhts is rattling markets. The comments from Fed's Barkin that more needs to be done, could mean that markets have got it all wrong again and another repricing looms around the corner.   

Should the US Dollar jump to 105.00 on the back of the Fed Minutes, 105.12 is a key level to keep an eye on. One step beyond there comes 105.88, the high of November 2023. Ultimately, 107.20 – the high of 2023 – could even come back into scope, but that would be when several inflation measures are coming in higher than expected for several weeks in a row. 

The 100-day Simple Moving Average looks to be getting chopped up again, though the DXY looks to be drawn to it each time it snaps below 104.13 The 200-day SMA near 103.72 looks more solid as a support. Should that give way, look for support from the 55-day SMA near 103.17.

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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