- The US dollar is consolidating in a very narrow range.
- The economic calendar kicks off with US PPI and Fed speakers.
- The US Dollar Index is retreating and flirting with a break below 105.00
The US dollar (USD) retreats after the initial shock behind the release of the Producer Price Index. The downward revisions are good enough for markets to bet on a less hot print of the Consumer Price Index on Wednesday. The main event left now is Fed Chairman Jerome Powell to hear if he backs that view and pushes back on earlier forecasts for rate cuts.
On the economic front, all the economic data was released this Tuesday. Traders can now start positioning for the Consumer Price Index (CPI) release on Wednesday. With this PPI release, traders will begin to double down on a possible CPI easing. That would open the door for June and close in September as a near certainty of an initial rate cut by the Fed.
Daily digest market drivers. Powell believes in sustainability longer
- The Qatar World Economic Forum started on Tuesday morning. Global Leaders headlines may be released throughout the week.
- The National Federation of Independent Business’ U.S. Small Business Optimism Index was 89.7 in April, up from 88.5 in March.
- At 12:30 GMT, the final reading of the producer price index for April was released.
- Monthly headline PPI came in at 0.5%, coming from a revised -0.1%.
- Annual headline PPI accelerated to 2.2% from a revised 1.8%.
- Monthly core PPI jumped to 0.5%, revised from -0.1%.
- Annual core PPI was also steady at 2.4%.
- The US Red Book for the week ending May 10 is due to be released at approximately 12:55 GMT. The previous figure was 6%.
- Two Fed spokesmen this Tuesday.
- Voting Federal Reserve Governor Lisa Cook had no major comments in her speech at around 13:10 GMT.
- Federal Reserve Chairman Jerome Powell participated in a moderated discussion with Dutch Central Bank Governor Claas Knot in Amsterdam.
- Powell has spoken out against raising interest rates, though he said the outcome could be sustainable for longer.
- US stocks are trading lower after the US opening bell, while European stocks can’t seem to shake off their red numbers for this Tuesday.
- The CME Fedwatch Tool suggests a 91.1% chance that the Federal Reserve’s rate will remain unchanged in June. There is also no chance of a rate cut in July, while for September the tool shows a 49% chance that rates will be 25 basis points below current levels.
- The benchmark 10-year US Treasury is trading around 4.46%, testing Tuesday’s low.
Technical analysis of the US dollar index. Powell keeps his cards close to his chest
The US Dollar Index (DXY) is trading fairly steady above 105.00, although it is slightly higher. Traders are clearly looking for direction or confirmation of what to do next for the Greenback. Rather, Fed Chairman Jerome Powell or the CPI print on Wednesday would be better times to see where the DXY is headed.
On a rebound, 105.52 (a key level since April 11) should be recovered, ideally with a daily close above this level, before targeting the April 16 high of 106.52 for a third time. Higher and above the 107.00 round, the DXY index could face resistance at 107.35, the October 3 high.
Unfortunately, the 55-day and 200-day simple moving averages (SMAs) at 104.54 and 104.25, respectively, have already provided major support. If those levels fail to hold, the 100-day SMA near 103.89 is the next best candidate.
Banking Crisis FAQ
The March 2023 banking crisis occurred when three US-based banks with heavy exposure to the tech sector and crypto suffered a surge in withdrawals, exposing serious weaknesses in their balance sheets, leading to their insolvency. The top ranked bank was California-based Silicon Valley Bank (SVB), which saw a surge in withdrawal requests as clients feared fallout from FTX and significantly higher yields offered elsewhere.
To make the repayments, Silicon Valley Bank was forced to sell its holdings of mostly US Treasuries. Due to the increase in interest rates caused by the Federal Reserve’s rapid tightening measures, however, Treasuries fell significantly. The news that SVB had taken a $1.8 billion loss on its bond sales sparked panic and a massive run on the bank that ended with the Federal Deposit Insurance Corporation (FDIC) being forced to take it over. The crisis spread to the city of San. -First Republic in Francisco, which was eventually saved by the coordinated efforts of a group of major US banks. On March 19, Switzerland’s Credit Suisse collapsed after several years of poor performance and was forced to be taken over by UBS.
The banking crisis was negative for the US dollar (USD) as it changed expectations about the future course of interest rates. Before the crisis, investors expected the Federal Reserve (Fed) to continue raising interest rates to combat persistently high inflation, but when it became clear how much stress this was putting on the banking sector, devaluing bank reserves of US Treasuries, it was expected , that the Fed will pause or even reverse its policy trajectory. As 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. First, it benefited from demand due to its status as a safe-haven asset. Second, it led investors to expect the Federal Reserve (Fed) to stop its aggressive rate hike policy out of fear of the impact on the financial stability of the banking system; Third, gold priced in USD (XAU/USD) rallied as the USD weakened.