Forex Today: Mood remains upbeat to start holiday-shortened week

FXStreetDec 23, 2024 7:33 AM

Here is what you need to know on Monday, December 23:

Improving risk mood caused the US Dollar (USD) to lose interest heading into the weekend. At the beginning of the week, US stock index futures trade in positive territory and the USD Index struggles to gain traction. Chicago Fed National Activity Index for November and Conference Board's Consumer Confidence Index for December will be featured in the US economic docket on Monday.

US Dollar PRICE Last 7 days

The table below shows the percentage change of US Dollar (USD) against listed major currencies last 7 days. US Dollar was the strongest against the Japanese Yen.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.69%	0.43%	1.97%	0.98%	1.69%	1.95%	0.06%
EUR	-0.69%		-0.20%	1.39%	0.37%	1.16%	1.33%	-0.56%
GBP	-0.43%	0.20%		1.48%	0.56%	1.37%	1.51%	-0.38%
JPY	-1.97%	-1.39%	-1.48%		-0.99%	-0.28%	-0.00%	-1.81%
CAD	-0.98%	-0.37%	-0.56%	0.99%		0.75%	0.95%	-0.94%
AUD	-1.69%	-1.16%	-1.37%	0.28%	-0.75%		0.16%	-1.73%
NZD	-1.95%	-1.33%	-1.51%	0.00%	-0.95%	-0.16%		-1.89%
CHF	-0.06%	0.56%	0.38%	1.81%	0.94%	1.73%	1.89%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).

Softer-than-forecast inflation data from the US and the aversion of the US government shutdown attracted risk flows in the American session on Friday. The US Bureau of Economic Analysis reported that the core Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve's (Fed) preferred gauge of inflation, rose 0.1% on a monthly basis in November. This reading followed the 0.3% increase recorded in October and came in below the market expectation of 0.2%. Meanwhile, Congress approved a stopgap spending bill late Friday, avoiding a shutdown. Wall Street's main indexes gained about 1% on Friday and the USD Index lost more than 0.5%, erasing a portion of the Fed-inspired rally.

After falling sharply and touching a multi-week low below 1.0350, EUR/USD recovered on Friday but ended the week in negative territory. The pair fluctuates in a narrow channel above 1.0400 in the European morning on Monday.

GBP/USD slumped to its weakest level since May below 1.2500 early Friday but staged a decisive rebound in the second half of the day. The pair stays relatively quiet to begin the new week and trades above 1.2550. The UK's Office for National Statistics announced on Monday that the annualized Gross Domestic Product (GDP) growth for the third quarter got revised to 0.9% from the 1% reported in the initial estimate.

USD/JPY gained nearly 2% in the previous week and climbed to its highest level since July near 158.00. Following a sharp correction on Friday, the pair stays in a consolidation phase below 157.00 in the European morning on Monday.

Gold recovered on Friday and rose more than 1% on the day as the US Treasury bond yields turned south. XAU/USD continues to stretch higher to begin the week and was last seen trading at around $2,630.

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

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.

What are the key assets to track to understand risk sentiment dynamics?

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.

Which currencies strengthen when sentiment is "risk-on"?

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.

Which currencies strengthen when sentiment is "risk-off"?

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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