US Dollar flat in risk-on Monday session ahead of US GDP, PCE and ECB later this week

The US Dollar faces slight selling pressure on Monday.
Traders brace for US GDP, PCE data and ECB decision this week.
The US Dollar Index looks set to sell off as it is unable to breach through technical resistance.

The US Dollar (USD) is opening the week a bit on the backfoot. Some selling pressure appeared in Asia on early Monday morning, ahead of a packed week with a lot of data points. The busy week in the macroeconomic calendar comes along with no speeches from US Federal Reserve (Fed) officials as they are in their blackout period ahead of the January 31 rate decision.

On the economic front, the main elements will come on Thursday and Friday, with the US Gross Domestic Product (GDP) numbers and the Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation measure, respectively.. The European Central Bank (ECB) and its Chairman Christine Lagarde will also decide on its monetary policy on Thursday. Until then, a very quiet start of the week is ahead on Monday, with no big economic data points scheduled.

Daily digest market movers: Calm before the storm

China disappointed markets this morning by keeping its Loan Prime Rates unchanged. Several market participants were expecting some easing to support the Chinese economy.
A new $20 billion dollar plan to support Ukraine might be put on hold by the EU.
Nasdaq futures rally substantially ahead of the US opening bell.
The US Treasury is heading to markets to allocate a 6-month and a 3-month bill at 16:30 GMT.
Equity markets are up across the board, with Japan leading the uprising. Both the Nikkei and the Topix are up over 1% near their closing bell. The laggards are markets in mainland China, which are down over 1% for both the Hang Seng and the Shenzhen Index. US S&P500 hits new all-time high during the US trading session.
The CME Group’s FedWatch Tool shows that markets are pricing in a 100% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Meanwhile, the Fed is in its blackout period, so officials will not communicate any further until the end-month meeting.
The benchmark 10-year US Treasury Note slides to 4.08%, coming from 4.13%. With risk appetite coming back in the markets, bonds are being bought again.

US Dollar Index Technical Analysis: Risk on not in favor of the DXY

The US Dollar Index (DXY) is facing substantial selling pressure. A daily chart shows a third consecutive day with lower highs and lower lows. This points to increasing selling pressure, while the DXY is failing to hold ground above the very important technical levels in the form of the 200-day Simple Moving Average (SMA) at 103.47 and the 55-day SMA at 103.28.

There are some economic data points that could still build a case for the DXY to get through those two moving averages again and run away. Look for 104.44 as the first resistance level on the upside, in the form of the 100-day SMA. If that gets scattered as well, nothing will hold the DXY from heading to either 105.88 or 107.20, the high of September.

A bull trap looks to be underway, where US Dollar bulls were caught buying into the Greenback when it broke above both the 55-day and the 200-day SMA in last week's trading. Price action could decline substantially and force US Dollar bulls to sell their positions at a loss. This would see the DXY first drop to 102.60, at the ascending trend line from September. Once below it, the downturn is open towards 102.00.

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.

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