- The US Dollar trades mildly up as the possible escalation in the Middle East conflict drives flows towards the Greenback.
- Fed speakers are starting to align with market expectations for gradual to no rate cuts this year.
- The US Dollar Index rally could pick up steam if Donald Trump leads further in the polls.
The US Dollar (USD) is a little bit in favor this Monday as three main factors provide some support for the Greenback. The first one is geopolitics, with Israel’s Prime Minister Benjamin Netanyahu vowing to step up retaliations after an Iranian drone struck near his private residence over the weekend. The second driver is coming from the Federal Reserve (Fed) after a few of its officials called for a gradual approach to reduce interest rates (or even no rate cuts) in order to retain control of inflation. Finally, the third driver is the upcoming US presidential election on November 5 with a small lead on the betting websites for former US President Donald Trump, which supports a stronger US Dollar.
The US calendar is very light in terms of economic data on Monday. Besides the US Treasury set to issue some more debt into the markets, four Fed members will speak. Markets will want to look for further confirmation from the Fed on the rate cut projections for the meetings in November and December after Atlanta Fed President Raphael Bostic said last week that the Fed should refrain from cutting.
Daily digest market movers: Fed speakers to guide markets on expectations
- Federal Reserve Bank of Dallas President Lorie Logan is set to speak at 12:55 GMT. Logan participates in a conversation at the 2024 SIFMA (Securities Industry and Financial Markets Association) Annual Meeting.
- At 17:00 GMT, Federal Reserve Bank of Minneapolis President Neel Kashkari participates in a town hall event hosted by the Chippewa Falls Chamber of Commerce in Chippewa Falls, Wisconsin.
- At 21:05 GMT, Federal Reserve Bank of Kansas City President Jeffrey Schmid delivers remarks about the US economic and monetary policy outlook at an event organized by the Chartered Financial Analyst Society in Kansas City.
- Federal Reserve Bank of San Francisco President Mary Daly is set to participate in a moderated Q&A session with the Wall Street Journal’s Nick Timiraos at the 2024 WSJ Tech Live at 22:40 GMT.
- Equities are taking a taling a turn for the worse with US futures turning negative on the day.
- The CME Fed rate expectation for the meeting on November 7 shows a 92.3% probability of a 25 basis points (bps) rate cut, while the remaining 7.7% is pricing in no rate cut. Chances for a 50 bps rate cut have been fully priced out.
- The US 10-year benchmark rate is trading at 4.11% after having flirted with a break below 4% on Wednesday.
US Dollar Index Technical Analysis: Residing near the high
The US Dollar Index (DXY) holds strong near last week’s peak. Expectations of a gradual approach to interest rate cuts by the Fed would support a stronger US Dollar. More upside could take place should former President Donald Trump take a further lead in the polls or gain a swing state majority, or should geopolitical tensions in the Middle East swirl further out of control.
A firm resistance ahead is 103.80, which aligns with the 200-day SMA. Above that, there is a small gap before hitting the pivotal level at 103.99 (the June 4 low) and the 104.00 big figure. Should geopolitical tensions increase or Trump further lead in the polls, a rapid swing up to the 105.00 round level and 105.53 (the April 11 high) could be on the cards.
On the downside, the 100-day SMA at 103.19 and the pivotal level at 103.18 (the March 12 high) are now acting as support and should prevent the DXY from falling lower. With the Relative Strength Index in overbought territory, a test on this level looks granted. Further down, the 55-day SMA at 101.86 and the pivotal level at 101.90 (the December 22, 2023, high) should avoid further downside moves.
US Dollar Index: Daily Chart
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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