- The US Dollar was able to eke out gains on Thursday after the steep decline from Wednesday.
- The Greenback edges further up ahead of a slew of Fed speakers taking the stage on Friday.
- The US Dollar Index flirts with a jump back above 104.70 towards 105.00
The US Dollar (USD) is continuing its recovery on Friday for a second day in a row after the steep decline seen on Wednesday, which marked this week for the Greenback. Markets have priced in two interest-rate cuts for 2024 due to the lower Consumer Price Index (CPI) data for April released of this week. However, markets are not out of the woods just yet with rate cut expectations as several Federal Reserve (Fed) officials pushing back against enthusiasm, calling to put the cork back on the champagne bottle as rates might be staying higher for longer than expected.
On the economic data front, it will be a very calm Friday with no real data points of importance available for the US Dollar to move on. Still, a fresh can of Fed speakers are lined up to speak, with Federal Reserve Bank of Minneapolis President Neel Kashkari making a second appearance this week. Federal Reserve Governor Christopher Waller is always good for a few market-moving comments, and right at the end of this Friday, Federal Reserve Bank of San Francisco President Mary Daly will wrap up the week.
Daily digest market movers: Awaiting Fed speakers
- Friday’s economic calendar doesn’t include any data points for the US to be released.
- Markets can digest all of this week’s data while a slew of Fed officials are set to close off the week:
- At 14:15 GMT, Federal Reserve Bank of Minneapolis President Neel Kashkari will have opening remarks at the International Organization for Standardization Technical Committee 68 (ISO/TC 68) financial services plenary meeting.
- Fed’s Kashkari will be followed by Federal Reserve Governor Christopher Waller, who will give a speech about payment innovation at the same stage.
- Near 16:15 GMT, Federal Reserve Bank of San Francisco President Mary Daly delivers a speech at the University of San Francisco School of Management commencement ceremony.
- Fed’s Daly and Waller are both voting members of the Federal Open Market Committee (FOMC) this year.
- Equities in Europe are unable to head into the green, while US equities after the opening bell remain stuck in a flat position.
- The CME Fedwatch Tool suggests a 91.3% probability that June will still see no change to the Federal Reserve's fed fund rate. Odds have changed for September, with the tool showing a 50.5% chance that rates will be 25 basis points lower than current levels.
- The benchmark 10-year US Treasury Note trades around 4.40%, and recovers from the lowest level for this month at 4.34%.
US Dollar Index Technical Analysis: Pure technically more easing ahead
The US Dollar Index (DXY) is further building on its recovery with, for now, a second day of green on the screen. However, the substantial slide from Wednesday looks to be too big to overcome for this week and will likely result in a negative end closing this Friday evening for the DXY.
The question is if the Greenback has enough reason to rally. Even though Fed officials are pushing back against upcoming interest-rate cuts, several economic data points this week from both leading and lagging indicators are starting to ease, which does not support the thesis that the US – its economy and its Dollar – is outperforming.
On the upside, several levels need to be regained again after Wednesday’s firm correction. The first is the 55-day Simple Moving Average (SMA) at 104.68, together with a pivotal level at 104.60. The next step up will be 105.12 and 105.52.
On the downside, the 100-day SMA around 104.11 is the last man standing to support the decline. Once that snaps, an air pocket is placed between 104.11 and 103.00. Should US Dollar outflows persist, the low of March at 102.35 and the low from January at 100.61 are levels to keep into consideration.
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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