US Dollar above 104 as Michigan inflation expectations point to sticky inflation
- The Greenback trades in the green against every major G20 peer.
- Traders see their hopes and bets for a quick return to normal rate policy dampen as Fed does not see any hikes soon.
- The US Dollar Index flirts with a jump to 104.00 after the recent consecutive downturn.
The US Dollar (USD) is making a fist and is pushing against the selling pressure from past few days and weeks, before heading into the Thanksgiving festivities on Thursday.. The publication of the Fed Minutes from their recent rate decision revealed that the whole board agrees that cuts are not in the plan for the upcoming meetings. This pours cold water on the market bets that cuts might be very close, even in December.
As if the devil is at play in this turnaround for the US Dollar, the calendar has helped the US Dollar Index (DXY) increase even further. Next to Durable Goods and Jobless Claims data, the consumer inflation expectations data from the University of Michigan confirmed that the Fed is correct in not letting loose too quickly. Although it was the final reading, a steady 3.2% still points to sticky inflation above the 2% target of the Fed.
Daily digest: Fed is right on sticky inflation
A very full calendar this Wednesday ahead of the Thanksgiving festivities on Thursday.
- Data releases kicked off at 12:00 GMT, with the Mortgage Bankers Association (MBA) Mortgage Applications for last week. Previous was at 2.8% an now came in at 3%.
- At 13:30 GMT, a lot of data points came out:
- Durable Goods Orders went from a revised 4.6%, previous 4.7%, to -5.4%.
- Durable Goods Orders without Transportation went from 0.4%, revised from 0.5% to 0%.
- Initial Jobless Claims for last week went from 233,000 to 209,000.
- Continuing Jobless Claims declined as well and went from 1,8620,000 to 1,840,000.
- Last focal point for this Wednesday was at 15:00 GMT with the University of Michigan numbers.
- The Consumer Sentiment Index headed from 60.4 to 61.3.
- The 5-year Inflation expectations stayed stable at 3.2%.
- Equities are mildly in the green as stock markets were not seeing any help from rather disappointing Nvidia earnings. The Sam Altman saga with Microsoft and AI is not helping either. Mild positive numbers are being noticed across Asia and Europe, with US futures flat ahead of the US opening bell.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 94.8% chance that the Federal Reserve will keep interest rates unchanged at its meeting in December. A juicy sidenote is that now 5.2% even thinks a hike might be at hand.
- The benchmark 10-year US Treasury Note yield trades at 4.38%, near new lows for the week.
US Dollar Index technical analysis: Fed not to be ignored
The US Dollar is snapping the game plan that should have brought the US Dollar Index below 103.00 for this week. Help came from the US Federal Reserve Minutes, which showed that all board members were unanimous that cuts are nowhere near an option. Markets got spooked and are seeing ample amounts of flow back into the Greenback, with the US Dollar Index trying to head back above the 200-day Simple Moving Average at xxxx.
The DXY is back above the 200-day SMA near 103.62, and will need to have a daily close above it in order to consolidate the region. Look for a further recovery bounce towards the 100-day SMA near 104.20. Should the DXY be able to close and open above it later this week, look for a return to the 55-day SMA near 105.71 with 105.12 ahead of it as resistance.
The 200-day SMA will try to play its role again as a crucial pivotal supportive level against any downturn. Should the index snap this level again later this week, the psychological 100.00 level comes into play. With a very slim economic calendar after this Wednesday and several US market participants off the desk for the holidays throughout the rest of this week, there is room for a potential big downturn.
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.
