- The US Dollar eases back to earlier levels for this week.
- Markets are seeing US equities trying to stage turnaround and head back into Risk On.
- The US Dollar retreats further below 105.00, heading to 104.50 again.
The US Dollar (USD) eases further on Thursday after US Gross Domestic Product numbers came out. Earlier on Wednesday, the Greenback had a strong rally which led the DXY US Dollar Index to break above the 105.00 mark. The US Dollar Index was strengthening as a well-known quote from Friends sitcom must come to mind to traders that are assessing the current market movements: “Well Judy you did it, she’s finally full!”. The bond markets are indeed full, full of US debt and investors gave signs to have had enough, sending yields higher in order to get all the debt allocated. The recent rise in Treasury yields is supporting the Greenback as the rate differential balance against other currencies widens.
On the economic data front, a busy economic calendar for this Thursday, with already some pivotal data being released: the US Gross Domestic Product. Even though it is the second estimate for Q1, again a softer reading was enough to ease the US Dollar further. The closing remarks from two US Federal Reserve members will be interesting to see.
Daily digest market movers: Again softer from previous reading
- Most important data points already got released:
- Weekly Jobless Claims:
- Initial Jobless Claims grew from last week 216,00 against 219,000 for this week.
- Continuing Jobless Claims have risen, though came in under expectations, from 1.787 million to 1.791 million.
- The second estimate of the US Gross Domestic Product numbers for the first quarter:
- The Price Index remained stable at 3.1%.
- Headline GDP went to 1.3% from the 1.6% expansion initially estimated.
- The headline Personal Consumption Expenditures (PCE) eased a touch from 3.4% to 3.3%.
- The core PCE went alongside with headline PCE from 3.7% to 3.6%.
- The Goods Trade deficit for April went substantially wider from $-92.3 billion to $-99.4 billion where a contraction of the deficit was expected.
- Wholesale Inventories for April went from a -0.4% to +0.2%.
- Weekly Jobless Claims:
- At 14:00 GMT, Pending Home Sales data is due to be released. Seeing the recent string of housing data, a negative print is expected. Pending home sales increased by 3.4% in March, but are expected to contract by 0.6% in April.
- Around 16:05 GMT, Federal Reserve Bank of New York President John Williams delivers keynote remarks at a lunch organized by the Economic Club of New York.
- Near 18:30 GMT comments are expected from Federal Reserve Bank of Dallas President Lorie Logan, who delivers a speech at an event organized by The Borderplex Alliance.
- European equities are further advancing in the green after the US GDP release. US eauiqities are trying to head into the green with the Dow Jones dragging.
- According to the CME Fedwatch Tool, Fed Fund futures pricing data suggests a 52.5% chance for keeping rates unchanged in September, against 42.1% chance for a 25 basis points (bps) rate cut and a 4.9% chance for an even 50 bps rate cut. A marginal 0.6% price in an interest rate hike.
- The benchmark 10-year US Treasury Note trades around 4.56%, steady for now.
US Dollar Index Technical Analysis: Back to normal for now
The US Dollar Index (DXY) has strengthened in the past few hours ever since markets saw yields soaring higher. This, in its turn, asked for a repricing of the Greenback in its stance against other currencies when looking at the rate differential. While US yields were sprinting higher, widening the gap with other countries, the US Dollar outperformed against other currencies.
On the upside, the DXY index reclaimed the key levels: the 55-day Simple Moving Average (SMA), currently at 104.96, and the 105.00 big round level. It will be important to see if these levels hold support should the US data weaken. Once that is proven, look for 105.52 and 105.88 on the upside.
On the downside, the 200-day SMA at 104.43 and the 100-day SMA around 104.37 are the last line of defence. Once that level snaps, an air pocket is placed between 104.30 and 103.00. Should the US Dollar decline persist, the low of March at 102.35 and the low from December at 100.62 are levels to consider.
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.