US Dollar off the lows though long head to recover Tuesday's losses
- The US Dollar sinks in the red after the first opening bell for this week
- The Euro is advancing firmly against the US Dollar after report shows wages in Eurozone remain elevated, attributing to sticky inflation.
- The US Dollar Index breaks further below 104 after the US opening bell.
The US Dollar (USD) is turning deep red in its first US opening bell of this week, with markets seeing European yields soaring against steady US rates. The uptick in European rates comes after an European Central Bank (ECB) report that sees wages in the Eurozone elevated and holding strong, which could push the first ECB rate cut further down the line than first anticipated. Next to that markets are not applauding the overnight move by the People’s Bank of China (PBoC) to cut its 5-year Loan Prime Rate.
China is playing in a whole other ballpark in terms of economic data with deflation, a sluggish job market, a haunted housing market and abating growth. The cuts are bigger than expected, though the market reaction is signalling more needs to be done in order to give China the boost to head back to its pre-pandemic growth and economic levels.
On the economic data front, The US Treasury will have its work cut out this Tuesday with no less than three bond auctions coming up. For more economic data, most data points are pushed forward to Wednesday due to the public holiday on Monday. All eyes are on the retailers in the stock markets this week with Walmart and Home Depot releasing earnings this Tuesday.
Daily digest market movers: US Dollar has a weak moment
- The February Philadelphia Fed non-manufacturing index came in at -8.8, coming from -3.7..
- European bond yields are jumping higher against US bond yields this Tuesday after the European Central Bank (ECB) released a report that revealed wages in the Eurozone are still remaining elevated, which could add to sticky inflatoin in the coming months, pushing back on current rate cut expectations. This pushes the Euro up against the US Dollar to 1.08, a level not seen since February 2nd.
- China has lowered its Loan Prime Rate in the following maturities:
- 1-year tenor unchanged at 3.45% where 3.40% was expected.
- the 5-year tenor cut from 4.20% to 3.95%, where 4.10% was expected.
- European car sales jumped 11% in January.
- The US Treasury department is doing a triple auction at 16:30 GMT. A 3-month, a 6-month and a 52-week bill will be auctioned.
- Equities are still in the red, looking for direction. Meanwhile, the extreme end of the risk assets is doing great with Ethereum and Bitcoin jumping substantially higher.
- The CME Group’s FedWatch Tool is now looking at the March 20th meeting. Expectations for a pause are 91.5%, while 8.5% for a rate cut.
- The benchmark 10-year US Treasury Note trades a little bit higher, near 4.28%, after its close on Friday at 4.28% and being closed over Monday due to the US public holiday.
US Dollar Index Technical Analysis: US Dollar outpaced by Euro
The US Dollar Index (DXY) is holding its ground above 104 though pressure is mounting again on the support level. This does not mean anything substantial as this Tuesday is actually Monday after the US was closed due to President’s Day. Expect to see traders catch up, with the first moves taking place on Wednesday in the buildup to the US Federal Reserve Minutes release on Wednesday evening.
Should the US Dollar jump to 105.00 by Friday, 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 holding for now, though pressure is building on it to snap, near 104.18, so the 200-day SMA near 103.70 looks more solid. Should that give way, look for support from the 55-day SMA near 103.14.
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
Filip Lagaart
FXStreet
Filip Lagaart is a former sales/trader with over 15 years of financial markets expertise under its belt.
