US Dollar sprints higher on trifecta of drivers

  • The US Dollar locks in gains for this Friday and this week, trading at the strongest level since early-November.  
  • Traders are pushing the Greenback higher while markets are diving the forex markets in two camps with weaker-for-longer and stronger-for-longer currencies
  • The US Dollar Index rallies towards 106.00.

The US Dollar (USD) is being driven higher with a big thanks to geopolitical tensions, Risk Off in US equity markets and the driving rate differential that sees US rates higher for longer against competitors. Investors don’t seem to be taking profits despite the recent rally,  which could mean that more US Dollar strength is on the cards for next week. The main driver for the move is the breakdown in European bonds, with yields sinking against very steady ones in the US, as the rate differential between both sides of the Atlantic expands. 

On the economic data front, traders are starting to applaud good data under the label of US exceptionalism. Equities could well be set to rally as well despite higher interest rates, buying the idea that there is no landing taking place in the economy and that the current level of high rates is even good to keep it from overheating.  The University of Michigan numbers this afternoon could build up a case further for the above narrative.

Daily digest market movers: ECB delivers kill shot for Euro

  • Several European Central Bank members came out this morning with overall a similar message that cuts need to take place now and June is a guarantee. This triggered already over 0.70% of losses for the Euro against the Greenback. The Euro acocunts for a near 57% of weighting in the US Dollar Index (DXY).
  • The Import and Export Price Indexes data for March:  
    • The monthly Export Price Index went from 0.7% to 0.3%.
    • The monthly Import Price Index jumped a little bit from 0.3% to 0.4%.
  • The University of Michigan preliminary numbers for April will be released at 14:00 GMT:
    • Consumer Sentiment is expected to decline a touch to 79 from 79.4.
    • Inflation expectations were at 2.8% previous, with an uptick expected after the recent Consumer Price Index (CPI) numbers.
  • Three US Federal Reserve Speakers take the stage later on Friday:
    • At 17:00 GMT, Federal Reserve Bank of Kansas City President Jeffrey Schmid will deliver a keynote speech.
    • Around 18:30 GMT, Federal Reserve Bank of Atlanta President Raphael Bostic delivers a speech on the Housing Crisis.
    • Finally, at 19:30 GMT, Federal Reserve Bank of San Francisco President Mary Daly will participate in a debate at a Fintech Conference.
  • A brutal day for equities, with European equities giving up their 1% gains earlier, dropping in the red, while US equities are sliding lower by 1%.
  • The CME FedWatch Tool prices in a 93.4% probability of no changes in the policy rate for May 1. For now, odds are the highest for September 18 with a 44.7% chance of a first rate cut against 28.5% for an unchanged stance.
  • The benchmark 10-year US Treasury Note trades around 4.51%, retreating a touch after hitting 4.59% overnight on Thursday. 

US Dollar Index Technical Analysis: If this does not wake up traders...

The US Dollar Index (DXY) performance shows that markets are still trembling after this week’s shocks. Hot US price pressures for a third consecutive month are quickly shifting Fed rate cut bets to later this year, breaking the governing dynamics for this year thus far. 

From now on, it becomes clear that whichever central bank – and accordingly the currency – needs to start cutting its benchmark rate will face severe punity from markets. On the contrary, central banks keeping rates steadier for longer are likely to be rewarded with a further appreciation in their currency provided that their economy is robust despite the current high rate regimes. The pack is being split in half: while weaker economies are set to get their currencies exposed, stronger ones are expected to rally further. 

On the upside, the first level for the DXY is the November 10 high at 106.01, just above the 106.00 figure. 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, fresh support levels need to be pencilled in as well, with the first important level at the 105.00 big figure. Further down, 104.60 should also act as a support, ahead of the region with both the 55-day and the 200-day Simple Moving Averages (SMAs) at 103.97 and 103.84, respectively.

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.


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