- DXY Index recovers and flirts with November highs.
- Initial Jobless Claims data came out slightly lower than expected.
- Fed’s stance remains hawkish, persistently increasing pressure on US yields.
The US Dollar Index (DXY) rose toward 106.25 on Thursday and appears on track to test the November 1 high near 107.10. What is underpinning this rise is the Federal Reserve’s (Fed) hawkish stance, along with a related recovery of US Treasury yields. Low Jobless Claims also benefited the US Dollar.
The US economy remains resilient, showing stubborn inflation and a strong economy. This has made the Fed adopt more hawkish messaging, and markets are delaying the start of the easing cycle.
Daily digest market movers: DXY demonstrates persistent growth coupled with robust inflation
- Fed remains committed to a hawkish stance, given ongoing inflation and robust growth in the US.
- Fed officials on Thursday spoke cautiously, asking for patience in regard to interest rate cuts.
- Market forecasts for the Fed’s upcoming meeting showed an important shift and the chances for a rate cut in June have plunged to 20%, while the possibility for a rate cut in July dropped to 50%. Current estimates suggest a likely first cut in September with a 75% probability of a second one in December.
- The US Treasury bond yields show an upward trend for the 2-year, 5-year, and 10-year bonds, currently at 4.98%, 4.68% and 4.64%, respectively.
- On the data front, weekly Jobless Claims came in at 212K, lower than the 215K expected, adding arguments for a strong labor market.
DXY technical analysis: DXY bulls step in and recover ground
The indicators on the daily chart reflect a positive bias for DXY. The Relative Strength Index (RSI) has a positive slope, sitting comfortably in positive territory. This implies an underlying bullish momentum. Complementing this bullish bias is the Moving Average Convergence Divergence (MACD), which shows rising green bars, contributing to the overall buying sentiment.
As for the Simple Moving Averages (SMAs), the DXY pair remains above the 20, 100, and 200-day SMAs, inferring that buying momentum is strong. Adding to this bullish scenario is the ongoing resilience of the bulls, further grounding positive sentiment.
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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