- The US Dollar sees its retreat picking up speed in the US session Monday after failing to break Friday's high.
- Traders are looking forward to a very choppy trading week, with a bank holiday on Friday.
- The US Dollar Index steadies in the mid-104.00 range ahead of GDP and PCE data.
The US Dollar (USD) is retreating on Monday ahead of the US session in a rather calm week ahead, with many trading desks and markets across the globe closed on Good Friday. Traders will likely continue to speculate on whether the Fed’s thesis of three cuts for this year is still valid, with a few interesting leading economic indicators and US Gross Domestic Product (GDP) numbers at hand. As if that is not enough, on Good Friday (with thin liquidity and most markets closed), the US will release the Fed’s preferred inflation gauge: the Personal Consumption Expenditures (PCE) Price Index for February.
On the economic data front, Monday offers a soft opening for the trading week with only US New Home Sales as the data point to trade on. Three US Federal Reserve members are due to make an appearance: Lisa Cook, who is a member of the Board of Governors at the Fed, Chicago Fed President Austan Goolsbee and Atlanta Fed Raphael Bostic, with Bostic repeating his stance for just one cut while Goolsbee rather sees three as best scenario.
Daily digest market movers: retreat on Monday
- The People’s Bank of China (PBoC) fixed its Yuan substantially stronger against the US Dollar, triggering a lower USD/CNH, which, in a domino effect, puts the Greenback on the backfoot.
- The release of Minutes from the latest Bank of Japan meeting saw equities in Japan plunge as the documents signalled that the BoJ is considering to hike interest rates more than what markets were expecting.
- This Monday kicked off with New Home Sales data for February, which saw a decline by 0.3% against the previous month.
- Three Fed speakers on the docket for this Monday:
- Atlanta Fed President Raphael Bostic has already spoked and repeated his call for just one rate cut for this year.
- Chicago Fed President Austan Goolsbee could not be further apart from Bostic, by saying three cuts are the best scenario forward.
- US Fed Board member Lisa Cook will speak around 14:30 GMT.
- The US Treasury is set to allocate three fresh bond issuances this Monday:
- A 3-month and a 6-month bill near 15:30 GMT.
- A 2-year note is expected to be placed at 17:00 GMT.
- Equities are falling sharply on Monday. Asia indices are down, led by Japan’s Nikkei, which closed off at more than 1% in the red. Europe is set to close rather flat, while US equities are down by 0.25%.
- According to the CME Group’s FedWatch Tool, expectations for the Fed’s May 1 meeting are at 89.2% for keeping the fed funds rate unchanged, while chances of a rate cut are at 10.8%.
- The benchmark 10-year US Treasury Note trades around 4.2%, ralying off the low with the high of 4.34% last week as target.
US Dollar Index Technical Analysis: Fed needs to improve its communication
The US Dollar Index (DXY) is trading broadly steady above 104.00. However, some easing could be in the cards this week as the Greenback looks for that equilibrium between the dovish Fed and the rather challenging markets on that possible outcome. The truth will probably be somewhere in the middle, which means the DXY could retreat a few points to challenge 104.00 and snap below this barrier by the end of the week.
The DXY is still eyeballing that pivotal level near 104.60, where last week’s rally peaked out. Further up, 104.96 remains the first level in sight. Once above there, the peak at 104.97 from February comes into play ahead of the 105.00 region, with 105.12 as the first resistance.
Support from the 200-day Simple Moving Average (SMA) at 103.72, the 100-day SMA at 103.50, and the 55-day SMA at 103.61 are getting a fresh chance to show their importance. The 103.00 big figure looks to remain unchallenged for now after the decline from the Fed meeting last week got turned around way before reaching it.
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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