- The US Dollar eases a touch despite safe-haven support on early Friday trading.Â
- Tensions in the Middle East flared up again with reports of Israel attacking an Iranian military base.Â
- The US Dollar Index snaps below 106.00, though pressure is mounting for a break below it.Â
The US Dollar Index (DXY), which tracks the US Dollar against a basket of six major currencies, eases and gives up earlier gains driven by the reports of the attack from Israel on Iran, confirmed by US officials. While markets are awaiting any comments or headlines out of Iran, some easing is taking place in safe-haven assets after earlier big inflows in the Greenback, the Japanese Yen (JPY) and the Swiss Franc (CHF). Any harsh rhetoric from Iran might cause a resurgence in the safe-haven demand and further sell-off in risk assets.
On the economic data front, a very thin calendar on Friday, with only Federal Reserve Bank of Chicago President Austan Goolsbee set to speak at a Conference in Chicago. For the main part of the day, markets will be focused on any headline coming out of the Middle East. In terms of rate projections, should Oil prices remain elevated for months to come, the US Federal Reserve (Fed) might have an issue with inflation accelerating because of the rising energy component.Â
Daily digest market movers: Easing off
- Tensions flared up in the Middle East after Israel targeted an Iranian military airforce base and triggered a shock across the markets in several asset classes, though some easing is taking place:Â
- Equities were slumping in the red, though off the lows now.
- Bonds are still in demanded, with yields declining.
- Both the Greenback, the Swiss Franc and the Japanese Yen saw substantial inflows, though are starting to see outlflow now.
- In the commodity space, both Brent and Crude are trading in the red after earlier spiking higher.Â
- De-escalation is taking place with markets seeing the attack only as small, while Iran said it sees no need to retaliate now.Â
- At 14:30 GMT, Federal Reserve Bank of Chicago President Austan Goolsbee participates in a moderated Q&A at the Association for Business Journalists 2024 SABEW Annual Conference in Chicago.
- Surprise comments from European Central Bank (ECB) member Edward Scicluna, who said that the ECB should even consider a 50 basis point cut at its next meeting as inflation is set to undershoot 2%.
- Equity markets are not doing well on the back of the escalation in the Middle East and trade in the red across the board. However, European and US equity futures are off their lows in the first part of European trading hours.Â
- According to the CME Group’s FedWatch Tool, expectations are further cementing a no-change to the Fed’s monetary policy in June.
- The benchmark 10-year US Treasury Note trades around 4.60%, rather stable after a brief surge to 4.63% earlier on Friday.Â
US Dollar Index Technical Analysis: rates still matter
The US Dollar Index (DXY) might be facing some selling pressure despite the current tensions escalating in the Middle East. This sounds contradictory but makes sense, seeing that bond prices are jumping higher, pushing yields lower and both the Japanese Yen and the Swiss Franc outpacing the Greenback in terms of inflows in the race to safe havens. This paints a very mixed picture, and with markets already having priced in the events from this morning, the US Dollar could be set to ease a touch, with the DXY possibly briefly sliding back below 106.00 by the close on Friday.Â
On the upside, the fresh Tuesday’s high at 106.52 is the level to beat. Further up and above the 107.00 round level, the DXY Index could meet resistance at 107.35, the October 3 high.Â
On the downside, the first important level is 105.88, a pivotal level since March 2023. Further down, 105.12 and 104.60 should also act as support ahead of the region with both the 55-day and the 200-day Simple Moving Averages (SMAs) at 104.17 and 103.91, respectively.
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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