- The US Dollar slides lower ahead of final US GDP data and Thursday’s US opening bell.
- Equity markets are shaky after Wednesday’s 500-points drop in the Dow Jones.
- The DXY US Dollar Index is torn between risk-on mood and Fed speakers pushing back on rate cut bets.
The US Dollar (USD) trades lower on Thursday in the European session, after a very calm Asian one. From a technical point of view, the US Dollar Index (DXY) is likely to face a breakout soon, and lower liquidity ahead of Christmas could lead to large moves as the economic calendar gains momentum at the end of the week.
On the economic front, some heavyweight data is set to hit the markets on Thursday. All eyes will be on the third estimate of the US Gross Domestic Product (GDP) reading. Although not much movement is expected in this third reading, it could remind markets that the US economy is in good shape, putting the US Dollar back in favour of investors’ last bets before New Year.
Daily digest Market Movers: Technical moves
- Russia tells Japan that military exercises with the US and Australia on Hokkaido are seen as a potential threat to its security.
- Angola has announced it will leave OPEC+. The news does not come as a surprise seeing the latest spat in the most recent OPEC+ gathering where Saudi Arabia asked of all participants to have production cuts. Angola and some other African nations issues vetoes against this demand.
- A very chunky batch of data will be released at 13:30 GMT:
- The third estimate of US Gross Domestic Product (GDP) numbers. Expectations are for economic growth to be unrevised at a 5.2% annualized rate in the third quarter. The Personal Consumption Expenditures Prices for the quarter is expected at 2.8% and the core measure is seen at 2.3%.
- Weekly Initial Jobless Claims are expected to pick up from 202,000 to 215,000.Continuing Claims are expected to rise from 1.876 million to 1.888 million.
- At 16:00 GMT, the Kansas Fed Manufacturing Activity Index for December will be published. The previous number was at -3.
- Equities are struggling for direction after US equities sold off in the last trading hour on Wednesday. Japanese equities saw profit taking, with more than 1% losses in both the Nikkei and Topix indexes. European indices are down by 0.50%, while US equities futures are up 0.50%.
- The CME Group’s FedWatch Tool shows that markets are pricing in an 87.6% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 12.4% expect the first cut already to take place.
- The benchmark 10-year US Treasury Note trades near 3.86%, the lowest level since summer.
US Dollar Index Technical Analysis: Yields still going lower despite inflation questions
The US Dollar Index is in full consolidation mode. With clear lower highs and higher lows, buyers and sellers are pushed toward each other. A breakout looks primed for either Thursday (with the US GDP and Jobless Claims releases) or Friday (with Durable Goods and Personal Consumption Expenditures numbers). Either way, the US Dollar could still sink or rally by 1% into the last trading day before Christmas.
Any upbeat surprise in data that could contradict rate cuts bets or geopolitical events that trigger US Dollar inflow could still make the DXY head higher. On the daily chart, look for 103.00 as the first level to watch. Once trading above there, the 200-day Simple Moving Average (SMA) at 103.50 is the next important level to get to.
To the downside, the pivotal level at 101.70 – the low of August 4 and 10 – is vital to hold. Once broken, look for 100.82, which aligns with the bottoms from February and April. Should that level snap, nothing will stand in the way of DXY heading to the sub-100 region.
Risk sentiment FAQs
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.
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.
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.
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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