US Dollar flat while yields are picking up after their crash landing last week

The US Dollar trades flat with markets returing to carry trades.
France’s political uncertainty continues to weigh on the country’s bonds and stocks.
The US Dollar index trades above 105.50 ahead of a soft Monday opening.

The US Dollar (USD) is trading flat to mildly in the red with US trading desks unsure how to trade French political uncertainty. President Emmanuel Macron’s decision to call for snap legislative elections and the possibility of a far-right-dominated parliament spooked investors, who sold French assets on concerns about how Macron would cope with such a scenario. Sovereign bond spreads in Europe are widening even more, signalling a bond market in distress. Should the bond market continue its rout, the possibility of an intervention by the European Central Bank (ECB) shouldn’t be ruled out in order to keep the European bond market cohesive and in sync with its monetary policy.

On the economic data front, a very quiet start for this week from the US perspective with some lighter data ahead. Pivotal elements to look forward to are the Retail Sales on Tuesday and the Purchasing Managers Index (PMI) numbers on Friday. Traders will need to assess what will get priority: softer US data which would see an easing US Dollar, or will it be again the European political turmoil which would rather see US Dollar strength.

Daily digest market movers: Can Harker help out?

At the start of the European trading session on Monday, European sovereign bond spreads are widening even further than Friday (80 basis points at the time of writing between French and German 10-year benchmark bond yields). A dispersion in sovereign bond yields per country is causing issues for the European Central Bank (ECB) as it has only one overall monetary policy rate that it can use to control inflation in the Eurozone. When bond spreads between countries are getting too wide and too dispersed, the ECB has more difficulties controlling local price forces, which might lead to local flare-ups in inflation or even sudden deflation. The second element is that those countries might start having issues to fund their sovereign debt on international markets and might trigger a bank run or having the ECB stepping in to offer a lifeline to that country so that it doesn’t default on its debt. The best example of that was Greece in 2010 during the sovereign debt crisis.
At 12:30 GMT, the NY Empire State Manufacturing Index for June got released. The index came in at contraction of 6, which is better than the -15.6 from previous time.
Near 17:00 GMT, Federal Reserve Bank of Philadelphia President Patrick Harker participates at the Global Interdependence Centre's 42nd Annual Monetary and Trade Conference.
Equity markets are looking for direction. European equities are trying to snap the losing streak, even with the bond market turmoil. US Futures are mildly in the green.
The CME FedWatch Tool shows a 33.3% chance of the Fed interest rate remaining at the current level in September. Odds for a 25-basis-points rate cut stand at 59.0%, while a very slim 7.7% chance is priced in for a 50-basis-points rate cut.
The benchmark 10-year US Treasury Note slides to the lowest level for this month, near 4.28%, ticking up a bit.

US Dollar Index Technical Analysis: Rate off their lows

The US Dollar Index (DXY) would likely not be where it is this Monday if it were not for the current European political turmoil. With a higher DXY, there is the risk of a quick correction if European headline risk start to abate and US data comes on the soft side. A fair warning thus that this US Dollar strength might be short-lived.

On the upside, no big changes to the levels traders need to watch out for. The first is 105.52, where the DXY is trading around, a barrier that held during most of April. The next level to watch is 105.88, which triggered a rejection at the start of May and will likely play its role as resistance again. Further up, the biggest challenge remains at 106.51, the year-to-date high from April 16.

On the downside, the trifecta of Simple Moving Averages (SMA) is still playing support. First is the 55-day SMA at 105.10. A touch lower, near 104.55 and 104.47, both the 100-day and the 200-day SMA are forming a double layer of protection to support any declines. Should this area be broken, look for 104.00 to salvage the situation.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

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