US Dollar eases while Euro prints fresh 14-month high against the Greenback
- The US Dollar testing this year's low for more downside.
- Recession fears are further weakening the Greenback
- The US Dollar Index flirts with a fresh 14-month low and could slip below 100.00 if more selling pressure occurs.
The US Dollar (USD) trades in the red against most major Asian currencies, such as the Chinese Yuan (CNY) or the Indian Rupee (INR), and the Euro (EUR) where it is even hitting a fresh 14-month high just ahead of the US trading session at 1.1214. The reshuffle comes after investors relocate their investments from the US to Chinese equities. The move is triggered by a massive stimulus plan from the Chinese government that was implemented on Tuesday.
On the economic data front, there is a very light calendar ahead, with no real market-moving data on Wednesday. One element that might draw some attention is comments from Federal Reserve (Fed) Governor Adriana Kugler, who delivers a speech about the US economic outlook at the Harvard Kennedy School in Cambridge, Massachusetts. From there, markets will be on edge over the US Q2 Gross Domestic Product (GDP) release, and Fed Chairman Jerome Powell set to speak on Thursday.
Daily digest market movers: Repositioning already ahead of Thursday
- “Sentiment is firing up in Asian markets after China announced a raft of policy stimulus measures,” damping demand for the Dollar, said Wei Liang Chang, a foreign exchange and credit strategist at DBS Bank in Singapore, Bloomberg reports.
- At 11:00 GMT, the Mortgage Bankers Association (MBA) released its weekly mortgage applications index. There was a surge of 11.0% in applications against 14.2% last week.
- Related to mortgages, New Home Sales are due at 14:00 GMT. Expectations are for a touch softer number at 0.700 million units in August against 0.739 million previously.
- The US Treasury will allocate a 5-year Note around 17:00 GMT.
- At 20:00 GMT, Federal Reserve Governor Adriana Kugler delivers a speech about the US economic outlook at the Harvard Kennedy School in Cambridge, Massachusetts.
- All equity markets are in the red, except for the Chinese equities which are rallying for a second day, supported by the Chinese stimulus measures.
- The CME Fedwatch Tool shows a 41.6% chance of a 25-basis-point rate cut at the next Fed meeting on November 7, while 58.4% is pricing in another 50-basis-point rate cut.
- The US 10-year benchmark rate trades at 3.76%, retreating from its attempt earlier to print a fresh monthly high.
US Dollar Index Technical Analysis: Some bets are placed
The US Dollar Index (DXY) is flirting with a fresh 15-month low after Tuesday’s data and China stimulus triggered some further devaluation for the Greenback. Going forward, rather the main data on Thursday and Friday will act as catalysts that might move the DXY. Watch out for the US Q2 Gross Domestic Product (GDP), that could trigger recession fears in case it drops.
The upper level of the September range remains at 101.90. Further up, the index could go to 103.18, with the 55-day Simple Moving Average (SMA) at 102.42 along the way. The next tranche up is very misty, with the 100-day SMA at 103.61 and the 200-day SMA at 103.76, just ahead of the big 104.00 round level.
On the downside, 100.22 (the September 18 low) is the first support, and a break could point to more weakness ahead. Should that take place, the low from July 14, 2023, at 99.58, will be the next level to look out for. If that level gives way, early levels from 2023 are coming in near 97.73.
US Dollar Index: Daily Chart
Banking crisis FAQs
The Banking Crisis of March 2023 occurred when three US-based banks with heavy exposure to the tech-sector and crypto suffered a spike in withdrawals that revealed severe weaknesses in their balance sheets, resulting in their insolvency. The most high profile of the banks was California-based Silicon Valley Bank (SVB) which experienced a surge in withdrawal requests due to a combination of customers fearing fallout from the FTX debacle, and substantially higher returns being offered elsewhere.
In order to fulfill the redemptions, Silicon Valley Bank had to sell its holdings of predominantly US Treasury bonds. Due to the rise in interest rates caused by the Federal Reserve’s rapid tightening measures, however, Treasury bonds had substantially fallen in value. The news that SVB had taken a $1.8B loss from the sale of its bonds triggered a panic and precipitated a full scale run on the bank that ended with the Federal Deposit Insurance Corporation (FDIC) having to take it over.The crisis spread to San-Francisco-based First Republic which ended up being rescued by a coordinated effort from a group of large US banks. On March 19, Credit Suisse in Switzerland fell foul after several years of poor performance and had to be taken over by UBS.
The Banking Crisis was negative for the US Dollar (USD) because it changed expectations about the future course of interest rates. Prior to the crisis investors had expected the Federal Reserve (Fed) to continue raising interest rates to combat persistently high inflation, however, once it became clear how much stress this was placing on the banking sector by devaluing bank holdings of US Treasury bonds, the expectation was the Fed would pause or even reverse its policy trajectory. Since higher interest rates are positive for the US Dollar, it fell as it discounted the possibility of a policy pivot.
The Banking Crisis was a bullish event for Gold. Firstly it benefited from demand due to its status as a safe-haven asset. Secondly, it led to investors expecting the Federal Reserve (Fed) to pause its aggressive rate-hiking policy, out of fear of the impact on the financial stability of the banking system – lower interest rate expectations reduced the opportunity cost of holding Gold. Thirdly, Gold, which is priced in US Dollars (XAU/USD), rose in value because the US Dollar weakened.
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