- The US Dollar ties up with gains on Thursday ahead of the US trading session.
- US President Trump is set to speak at the World Economic Forum in Davos.
- The US Dollar Index (DXY) is back above 108.00, though faces some mild selling pressure again.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is having a change of heart and is making its way back towards levels seen last week before US President Donald Trump’s inauguration. Still, there is a long road to recovery, although after a few days with an almost empty US data calendar, traders can brace for a pickup in the next releases. Positive and upbeat data could put inflation concerns back on the agenda, which would fuel higher rates and a stronger US Dollar again.
Meanwhile, the US economic calendar is starting to take shape with the weekly Jobless Claims and the Kansas Fed Manufacturing Activity Index. This all precedes the release of Friday’s S&P Global Purchase Managers Index (PMIs) numbers. Later this Thursday, US President Trump will also appear virtually at the Davos World Economic Forum where he will hold a speech.
Daily digest market movers: Brace for markets facing US data again
- At 13:30 GMT, the weekly Jobless Claims for the week ending on January 17 are due. Expectations are for the initial claims to tick up to 220,000, coming from 217,000 in last week’s count. The Continuing Claims for the week of January 10 are set to head higher to 1.860 million, from 1.859 million previously.
- At 16:00 GMT, the Kansas Fed will release its manufacturing activity survey for January. No forecast is available, with the previous reading at -5.
- In that same timeframe, US President Donald Trump will make a virtual appearance at the World Economic Forum in Davos.
- Equities are looking sluggish this Thursday, facing some profit-taking after its broad rally throughout the week.
- The CME FedWatch tool projects a 57.1% chance that interest rates will remain unchanged at current levels in the May meeting, suggesting a rate cut in June. Expectations are that the Federal Reserve (Fed) will remain data-dependent with uncertainties that could influence inflation during US President Donald Trump’s term.
- The US 10-year yield is trading around 4.638%, off its poor performance seen earlier this week at 4.528% and still has a long way to go back to the more-than-one-year high from last week at 4.807%.
US Dollar Index Technical Analysis: Geat ready for a spike in volatility again
The US Dollar Index (DXY) halts its correction and consolidates around 108.00 on Thursday. Upcoming US economic data this week could fuel inflation concerns again with higher rates and a stronger US Dollar as a result.
If the recovery in the DXY wants to continue its ascent, the pivotal level to gain control of is 109.29 (July 14, 2022, high and rising trendline). Further up, the next big upside level to hit before advancing further remains at 110.79 (September 7, 2022, high). Once beyond there, it is quite a stretch to 113.91, a double top from October 2022.
On the downside, the first area to watch is 107.80-107.90, which held this week’s correction. Further down, the convergence of the high of October 3, 2023, and the 55-day Simple Moving Average (SMA) around 107.50 should act as a double safety feature to catch any falling knives.
US Dollar Index: Daily Chart
Risk sentiment FAQs
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.
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.
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.
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.
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