- The US Dollar trades a touch higher after PPI data comes in stronger.
- Traders are keeping US interest rates elevated in the assumption less rate cuts from Fed.
- The US Dollar Index trades above 102.50 and struggles to break above 103.00.
The US Dollar (USD) ticks a touch higher on Friday after a very solid rally this week, with the rate differential becoming the main driver. The question going forward for next week will be if this upward move in US Treasury rates was a bit overdone, seeing the US Consumer Price Index (CPI) only marginally ticked up in September compared to the previous month. This contradicts what several Federal Reserve (Fed) officials have said this week, that US rates will go lower with more interest rate cuts from the Fed confirmed.
The economic calendar is facing this week’s last pieces of the puzzle. The US Producer Price Index (PPI) release for September wa already an upbeat surprise as with the US CPI release on Thursday. The last data point will be the preliminary reading from the University of Michigan on Consumer Sentiment and inflation expectations for October.
Daily digest market movers: PPI data hot
- At 12:30 GMT, the US Producer Price Index numbers for September are released:
- The monthly headline PPI fell to 0.0.% from 0.2% in the previous month, with core PPI falling in line of expecationas, down to 0.2% from 0.3% previous.
- The yearly headline PPI inflation went to 1.8% with the previous figure revised up from 1.7% yo 1.9%. The core PPI came in higher at 2.8%, coming from 2.4% which got revised up as well to 2.6%.
- At 14:00 GMT, the University of Michigan preliminary reading for October will be released:
- Consumer Sentiment is expected to head higher to 70.8, coming from 70.1.
- 5-year consumer inflation expectations were at 3.1% in September, with no forecast available.
- The readings could be distorted due to the hurricanes in the South of the US.
- There are a few Fed speakers to look out for on Friday:
- At 13:45 GMT, Austan D. Goolsbee, head of the Federal Reserve Bank of Chicago, gives opening remarks at the Community Bankers Symposium.
- At 17:10 GMT, Federal Reserve Governor Michelle Bowman (2024 FOMC voting member) delivers a virtual speech about community banking at the Federal Reserve Bank of Chicago Community Bankers Symposium.
- Equities are still dispersed, looking for direction. Minor losses and gains for the main European equities and US futures.
- The CME Fedwatch Tool shows an 84.0% chance of a 25 bps interest rate cut at the next Fed meeting on November 7, while 16.0% is pricing in no rate cut. Chances for a 50 bps rate cut have been fully priced out now.
- The US 10-year benchmark rate trades at 4.10, afloat above 4%.
US Dollar Index Technical Analysis: CPI and PPI support higher rates
The US Dollar Index (DXY) has had a quick sprint higher this week, with markets repositioning in the idea that interest rate cuts might be a certainty for the remainder of 2024. Although Fed officials are still very vocal on more rate cuts to come, the current move in US Treasury rates does not match with that message from the Fed. Either markets completely price out any rate cuts for 2024, which would mean the DXY break above 103.00, or it fades from here with US rates falling lower.
The psychological 103.00 is the first level to tackle on the upside. Further up, the chart identifies 103.18 as the very final resistance level for this week. Once above there, a very choppy area emerges, with the 100-day Simple Moving Average (SMA) at 103.26, the 200-day SMA at 103.77, and the pivotal 103.99-104.00 levels in play.
On the downside, the 55-day SMA at 101.91 is the first line of defence, backed by the 102.00 round level and the pivotal 101.90 as support to catch any bearish pressure and trigger a bounce. If that level does not work out, 100.62 also acts as support. Further down, a test of the year-to-date low of 100.16 should take place before more downside. Finally, and that means giving up the big 100.00 level, the July 14, 2023, low at 99.58 comes into play.
US Dollar Index: Daily Chart
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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