US Dollar starts the week with the right foot, calm week ahead
- The DXY Index trades mildly higher at around 102.60.
- Markets will remain quiet on Monday as US traders are on the sidelines celebrating MLK’s holiday.
- Investors digest last week’s inflation data from the US from December.
- The week's highlight will be December's Retail Sales and the Fed's Beige Book.
The US Dollar (USD) is enjoying slight gains with the DXY Index trading at 102.60, while US traders celebrate Martin Luther King Jr.’s holiday. No relevant highlights are expected in the session, and markets are still digesting last week’s US inflation readings from December.
The Fed's dovish stance, based on welcoming the cooling inflation and projecting no rate hikes in 2024, has recently weakened the USD and seems to be offsetting the resilience of the US economy while other economic blocks are weakening. Despite higher CPI numbers, the market remains stubborn and expects the Fed to initiate its easing cycle sooner rather than later, and the soft PPI readings gave markets a reason to bet on a less aggressive approach.
Daily digest market movers: US Dollar registers mild gains after CPI releases
- Last week, the US Bureau of Labor Statistics revealed that the Consumer Price Index (CPI) escalated to 3.4% YoY in December, surpassing November's 3.1% and the predicted 3.2% consensus figure.
- The core CPI dropped to 3.9%, lower than November’s 4%, but higher than the expected 3.8%.
- US Producer Price Index (PPI) for final demand rose by 1% on a yearly basis in December, slightly below market expectations of 1.3% and up from the revised 0.8% increase in November.
- The annual core PPI, which excludes volatile food and energy prices, increased by 1.8% in December, falling below both the November reading and analysts' estimates of 2% and 1.9%, respectively. The monthly core PPI remained unchanged for the third consecutive month.
- As for now, The CME FedWatch Tool shows that the odds of rate cuts in March and May remain elevated at 70% and 66%, respectively.
- This week the US will release Retail Sales figures from December and the Fed’s Beige Book, which may have an impact on those expectations.
Technical Analysis: DXY gets some traction, outlook is not yet bullish
From a technical analysis standpoint, the daily chart reflects that the index gained some traction. The positive slope in the Relative Strength Index (RSI) within positive territory suggests an increase in buying pressure. This optimistic aspect is echoed by the Moving Average Convergence Divergence (MACD) with its flat green bars pointing to a stabilization in bullish sentiment.
However, the index remains above the 20-day Simple Moving Average (SMA) but below the 100 and 200-day SMAs. This underpins a sense of bearish dominance in the broader trend, but bears need to raise their game to regain short-term control as the bulls have managed to keep the pair above the shorter-term SMA. Therefore, in the short-term technical outlook, it appears the bullish momentum has an upper hand despite bearish undertones due to the position on longer-term SMAs.
Support levels: 102.30, 102.00 (20-day SMA), 101.80.
Resistance levels: 102.70, 102.80, 103.00.
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.