US Dollar recovers some ground as the Israeli conflict escalate, eyes on FOMC minutes
- US Dollar continues trading weak but cleared some losses and jumped to 105.80.
- The United States President Joe Biden sounded aggressive against the Hamas terrorists.
- Raphael Bostic from Atlanta’s Fed delivered some dovish words. Eyes on inflation figures from September and FOMC minutes
The US Dollar (USD) measured by the US Dollar DXY Index cleared some losses during the American session thanks to a sour market mood driven by the escalation of the conflict between Israel and the Hamas terrorist group. However, Raphael Bostic from the Atlant’s Federal Reserve stated that the bank doesn’t need to raise rates any further and its dovish words applied additional pressure on the Greenback.
In the meantime, the United States economy still shows signs of not cooling down as September’s Nonfarm Payrolls (NFP) showed that job creation accelerated while unemployment rose and wage inflation declined. In addition, Manufacturing PMIs came in better than expected and contributed to investors placing hawkish bets on the Federal Reserve (Fed), which took the DXY index to multi-month highs above 107.00. Focus now shifts to Thursday's Consumer Price Index (CPI) figure from the US from September. On Wednesday, investors will keep an eye on the Federal Open Market Committee (FOMC) minutes from the September meeting to look for further clues regarding forward guidance.
Daily Digest Market Movers: US Dollar consolidates last week’s rally as dovish Fed officials make the US Dollar lose interest, eyes on Israel
- The US Dollar DXY index continues consolidating and slightly recovered to 105.80, tallying more than 1% losses in October after peaking at 107.35.
- The Greenback’s losses may be limited by the escalating conflict between Israel and the Hamas terrorist group as it could benefit from risk-off flows.
- In addition, the Hezbollah group was seen declaring targeting Israeli tanks despite the US warning to stay out.
- Some officials sounded dovish regarding the next Federal Reserve (Fed) decisions and added pressure on the USD.
- On Monday, Lorie Logan from the Fed stated that higher bond yields and restrictive financial conditions would mean “less need” for the central bank to continue hiking.
- Earlier in the session, Raphael Bostic noted that the Fed does not need to keep hiking, while Christopher Waller and Neel Kashkari didn’t deliver any relevant highlights.
- The minutes from September’s meeting of the Federal Open Market Committee (FOMC) are due on Wednesday, and the Consumer Price Index (CPI) figures from the same month are due on Thursday.
Technical analysis: US Dollar Index sees red and falls below the 20-day SMA
The US Dollar Index DXY sees a neutral-to-bearish technical outlook for the short term. The Relative Strength Index (RSI) displays a negative slope near the 50 middle-point while the Moving Average Convergence Divergence (MACD) stands in negative territory, indicating that the bears hold the upper hand in the short term.
That said, the index is comfortably above the 100 and 200-day Simple Moving Averages (SMA), indicating that the bulls command the broader scale. If they fail to defend the 20-day average at 105.90, more downside may be on the horizon, with support lining up at 105.50, 105.30 and 105.00.
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.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
