- US Dollar jumps higher as a flight to safe havens rolls through the markets at the start of the US session on Wednesday.
- US debt-ceiling talks in stalemate while CME Fed futures are at 50% for another hike in July.
- US Dollar Index flirting with 104 as a new high for April and May is being printed on the quote board.
The US Dollar (USD) has jumps higher as European equities decide to tank and push traders toward safe havens like the Greenback. White House and republicans plan to remuse debt talks on Wednesday, while the 1st of June is approaching fast. Markets meanwhile will look for further info from US Treasury Secretary Yellen who is due to speak at 14:00 GMT in front of the House Financial Service Commmittee.
On the macroeconomic data front, some fireworks are expected in the US session with Fed’s Waller due to speak and the FOMC Minutes from the latest meeting to be released at 18:00 GMT. Traders will want to see the voting behaviour and discussion points that have been put on the table in the last meeting in order to assess if another rate hike in July is plausible. Meanwhile concerns rise for the US inflation and Fed response on the back of UK inflation hitting a 30 year high in Europe.
Daily digest: US Dollar favored safe haven
- US MBA’s mortage applications index fell 4.6% last week.
- European equities take a turn for the worse just hours away from the start of the US trading session, triggering a flight to safe haven assets like the Greenback, Japan’s Yen and Germand bonds and US Treasury bills.
- Talks about the US debt ceiling remain unchanged while both the White House and GOP plan to continue on Wednesday.
- On Tuesday, Richmond Fed Manufacturing Index contracted to -15 from -10. Business Conditions bounced a little to -17, coming from -27.
- US S&P Global May Flash Services PMI came at 55.1 vs 53.6 from April. The Flash Composite PMI printed 54.5 vs 53.4 in April, and the Flash Manufacturing PMI came at 48.5 vs 50.2 in April.
- US Credit Default Swaps (CDS) jump higher and are nearing the peak of last Wednesday.
- US equity futures turn red as European equities drag them lower with the VIX near 20.
- The CME Group FedWatch Tool shows that markets are pricing in a 50% chance of rate hike for July after hawkish comments from Federal Reserve officials Jim Bullard and Neal Kashkari. Rate cuts have moved down the line, to as early as November 2023. The FOMC Minutes later this Wednesday could lock in the rate hike for the next meeting.
- The benchmark 10-year US Treasury bond yield trades at 3.67% and eases a little bit in yield as US and German bonds jump higher.
US Dollar Index technical analysis: Fresh high before the start of the US session
The US Dollar Index (DXY) has taken out both the 55-day and the 100-day Simple Moving Averages (SMA), respectively, at 102.45 and 102.85 on the upside. A new high got printed briefly for the past two months, but contracts a touch on Wednesday with the impasse in Washington on the talks to sort out the debt ceiling.
On the upside, 105.75 (200-day SMA) still acts as the price target to hit, as the next upside key level at 104.00 (psychological, static level) acts as an intermediary element to cross the open space.
On the downside, 102.85 (100-day SMA) aligns as the first support level to confirm a change of trend. In the case that breaks down, watch how the DXY reacts at the 55-day SMA at 102.48 in order to assess any further downturn or upturn.
How is US Dollar correlated with US stock markets?
Stock markets in the US are likely to turn bearish if the Federal Reserve goes into a tightening cycle to battle rising inflation. Higher interest rates will ramp up the cost of borrowing and weigh on business investment. In that scenario, investors are likely to refrain from taking on high-risk, high-return positions. As a result of risk aversion and tight monetary policy, the US Dollar Index (DXY) should rise while the broad S&P 500 Index declines, revealing an inverse correlation.
During times of monetary loosening via lower interest rates and quantitative easing to ramp up economic activity, investors are likely to bet on assets that are expected to deliver higher returns, such as shares of technology companies. The Nasdaq Composite is a technology-heavy index and it is expected to outperform other major equity indexes in such a period. On the other hand, the US Dollar Index should turn bearish due to the rising money supply and the weakening safe-haven demand.