US Dollar trading sideways with markets looking ahead for US CPI, Fed decision
- The US Dollar trades mixed on Wednesday, nearly flat against its most major peers.
- Traders are on edge over upcoming US CPI release for May and the Fed interest rate decision.
- The US Dollar index trades comfortably above 105.00 and is set to face some volatility.
The US Dollar (USD) trades nearly flat in Wednesday’s European session and holds above the 105.00 level ahead of two key economic events: the US Consumer Price Index (CPI) release for May and the US Federal Reserve (Fed) interest rate decision. Meanwhile, in the runup to the US data, markets can digest and let the dust settle over the turmoil in Europe and its recent election results.
On the economic front, market expectations for the monthly core CPI are very narrow, from a low estimate of 0.2% to a high estimate of 0.3%. Headline CPI is expected to range between 0.1% and 0.2%. Should the actual CPI number fall below the lowest expectation or come out above the highest, expect some substantial movements in the US Dollar Index (DXY).
Daily digest market movers: CPI disinflation to dictate summer mood
- At 11:00 GMT, the Mortgage Bankers Association (MBA) releases the Mortgage Applications number for the week ending on June 7. The previous week, a notable decline of 5.2% was printed, with no expectations available.
- At 12:30 GMT, the US Bureau of Labor Statistics will release the US Consumer Price Index for May:
- Monthly core inflation is expected to increase steadily by 0.3%.
- Monthly headline inflation is seen rising by 0.1% from the 0.3% increase in April.
- Yearly core inflation is expected to soften a touch to 3.5% from 3.6% in April.
- Yearly headline inflation should remain stable at 3.4%.
- Markets will digest the CPI release until 18:00 GMT, when the US Federal Open Market Committee (FOMC) will release its statement on the Federal Reserve’s interest rate decision. As markets have fully priced in an unchanged rate at 5.50%, the dot plot, where all Fed officials get to pencil in their projections and forecasts on how they see monetary policy going forward, will be more important.
- At 18:30 GMT, Fed Chairman Jerome Powell will take the stage and deliver a speech with questions and answers on the recent monetary policy decision.
- Asian equities are in the red across Japan and China. Europe seems to be snapping the losing sentiment and trades in the green, as the US futures.
- The CME FedWatch Tool shows a 47.4% chance of Fed interest rate at the current level in September. Odds for a 25 basic points rate cut stand at 48.3%, while a very slim 4.3% chance is priced in a 50 basic points rate cut
- The benchmark 10-year US Treasury Note slides to the lowest level for this week, near 4.4%, and flirts with further declines.
US Dollar index Technical Analysis: Powell can deliver a knee jerk reaction
The US Dollar index (DXY) is set to either trade another leg higher or to erase all weekly gains with the US CPI and Fed decision as main drivers on Wednesday. Although, one scenario might be playing out which would result in an actual standstill for the US Dollar. That would be if the disinflation is still on track with CPI coming in softer than expected, being contradicted later on with the Fed rate decision where Fed Chairman Jerome Powell could turn hawkish and say that the Fed will need to stay steady for longer in order to really get inflation where they want it to be.
On the upside, there are some technical or pivotal levels to watch out for. The first is 105.52, a level that held support during most of April. The next level to watch is 105.88, which triggered a rejection at the start of May and will likely play its role as resistance again. Further up, the biggest challenge remains at 106.51, the year-to-date high from April 16.
On the downside, a trifecta of Simple Moving Averages (SMA) is now playing as support. First, and very close, is the 55-day SMA at 105.07. A touch lower, near 104.48, both the 100-day and the 200-day SMA are forming a double layer of protection to support any declines in the US Dollar index. Should this area be broken down, look for 104.00 to salvage the situation.
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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