US Dollar consolidates gains after Powell signals caution on rate cuts
- The US Dollar strengthens on the back of overnight comments from Fed Chairman Powell.
- Israel has started its ground offensive in Lebanon, escalating tensions in the region.
- The US Dollar Index prints a four-day high ahead of ISM Manufacturing PMI data.
The US Dollar (USD) trades broadly positive on Tuesday ahead of the Manufacturing Purchasing Managers Index (PMI) numbers from the Institute for Supply Management (ISM). The positive turnaround for the Greenback took place after traders priced in less interest rate cuts from the Federal Reserve (Fed) on the back of Chairman Jerome Powell comments.
On the geopolitical side, Israel has started its incursion into Israel in what it calls “a limited ground offensive,” the Financial Times reports. Any further escalation of violence in the region could trigger safe-haven flows that generally tend to support the Greenback.
Looking at the economic calendar ahead, the ISM Manufacturing survey will be the main driver this Tuesday. Still, other elements will take up some attention as well. The JOLTS Job Openings report will give clues about how the demand for labor is evolving, while traders’ eyes and ears will need to be kept open as five Fed members are set to take the stage.
Daily digest market movers: Markets to become even more data driven
- Fed Chairman Powell left some remarkable comments overnight. One was that the Fed is even taking data into consideration for its upcoming policy meeting during its blackout period. This will make markets even more data dependent in the runup to the event.
- Israel is carrying out a “targeted” ground offensive in Lebanon, while Hezbollah is firing back with artillery and rockets targeting Israeli soldiers near the town of Metula. The United Arab Emirates, meanwhile, has issued a statement expressing deep concerns over Israel’s ground operation, warning of repercussions of this dangerous situation for the region, Bloomberg reports.
- At 13:45 GMT, the final reading of the S&P Global Manufacturing Purchasing Managers Index (PMI) for September will be released. Economists expect the number to be unchanged from its preliminary estimate of 47.
- At 14:00 GMT, the ISM Manufacturing numbers for September will be released:
- The headline PMI is expected to increase slightly to 47.5 from 47.2 a month earlier.
- Among the main subindexes, the Prices Paid component is expected to ease to 53.5 from 54, while the Employment Index is expected to rise to 47 from 46.
- In the slipstream of ISM, the JOLTS Job Openings for August will be released as well. Expectations are for a steady 7.670 million job openings against 7.673 million in July.
- Several Fed speakers will take the stage this Tuesday:
- At 15:00 GMT, Federal Reserve Bank of Atlanta Raphael Bostic delivers welcoming remarks and moderates a conversation with Federal Reserve Board Governor Lisa Cook at the Technology-Enabled Disruption conference in Atlanta.
- Near 22:15 GMT, Federal Reserve Bank of Richmond Thomas Barkin participates in a panel discussion with Atlanta Fed President Raphael Bostic and Boston Fed President Susan Collins at the Technology-Enabled Disruption conference in Atlanta.
- European equities are looking for direction, unsure on whether a possible rate cut from the European Central Bank (ECB) in October needs to be considered positive or to be perceived as a sign on the wall that activity in the eurozone is deteriorating quickly. US Futures are trading flat ahead of the US opening bell.
- The CME Fedwatch Tool shows a 63.0% chance of a 25 basis-point rate cut at the next Fed meeting on November 7, while 37.0% is pricing in another 50-basis-point rate cut.
- The US 10-year benchmark rate trades at 3.75%, looking to test the three-week high at 3.81%.
US Dollar Index Technical Analysis: Four-day high
The US Dollar Index (DXY) gets help from Fed Chairman Jerome Powell, whose comments have eased market expectations of another big rate cut for the upcoming rate decision in November. Fewer odds for a bigger cut support the US Dollar, as it subdues performance from other currencies in the DXY basket such as the Euro (EUR). Markets are increasingly pricing in that the European Central Bank (ECB) might be set to deliver a surprise rate cut in October, which widens the rate differential in favour of a stronger US Dollar.
The recovery looks to be a fierce one with the DXY already taking out four previous daily highs during Tuesday’s Asian trading. In case Dollar bulls can turn things further around, look at 101.90 for the next resistance level on the upside. Just above there, the 55-day Simple Moving Average (SMA) at 102.22 will come in.
On the downside, 100.62 is flipping back from resistance into support, in case the DXY closes above it this Tuesday. The fresh low of 2024 is at 100.16, so a test will take place before more downside takes place. Further down, and that means giving up the big 100.00 level, the July 14, 2023, low at 99.58 comes into play.
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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