- The US dollar is consolidating in a very tight range.
- The economic calendar begins with US PPI and Fed speakers.
- The US dollar index retreated and flirted with a break below 105.00
The US dollar (USD) retreated after an initial knee-jerk reaction following the release of the producer price index. The downward revisions are good enough for markets to bet on a less hot CPI print on Wednesday. The main event left now is Fed Chairman Jerome Powell to hear whether he backs that view and rejects any early initial forecasts of a rate cut.
On the economic front, all economic data for this Tuesday was released. Traders can now start positioning for Wednesday’s Consumer Price Index (CPI) release. With these PPI releases, traders will start doubling down on possible CPI easing. That would open the door to June and close in September as an almost certain initial rate cut by the Fed.
Market Movers Daily Digest: Powell believes in stability for longer
- The World Economic Forum in Qatar began on Tuesday morning. Headlines from world leaders may be released throughout the week.
- The National Federation of Independent Business’ April U.S. small business optimism index rose to 89.7 from 88.5 in March.
- At 12:30 GMT, final producer price index data for April was released:
- Monthly core PPI came in at 0.5%, coming from a revised -0.1%.
- Annual core PPI accelerated to 2.2% from a revised 1.8%.
- Monthly core PPI jumped to 0.5% from a revised -0.1%.
- Annual core PPI also remained steady at 2.4%.
- The US Red Book for the week ending May 10 is due to be released around 12:55 GMT. The previous number was 6%.
- Two Federal Reserve spokesmen this Tuesday:
- Voting Federal Reserve Governor Lisa Cook had no major comments in her speech around 13:10 GMT.
- Federal Reserve Chairman Jerome Powell participates in a moderated discussion with Dutch central bank governor Klaas Knot in Amsterdam.
- Powell has resisted raising rates, though he said steady for longer could be the outcome.
- US stocks are trading steady after the US open, 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 June will still see no change in the Fed’s interest rate. Odds of a rate cut in July are also off the cards, while for September the tool shows a 49% chance of rates being 25 basis points lower than current levels.
- The benchmark US 10-year Treasury is trading around 4.46%, testing Tuesday’s low
US Dollar Index Technical Analysis: Powell keeps his cards close to his chest
The US Dollar Index (DXY) is trading fairly solidly above 105.00, although it is a bit on the surface. Traders are obviously looking for direction or confirmation on what to do next for the greenback. Rather, Fed Chair Jerome Powell or Wednesday’s CPI print would be better times to see where the DXY is headed.
On the upside, 105.52 (key level of April 11) should be recovered, ideally by a daily close above that level, before targeting the April 16 high at 106.52 for a third time. On the upside and above the circular level of 107.00, the DXY could meet resistance at 107.35, the highest since October 3.
On the other hand, the 55-day and 200-day simple moving averages (SMAs) at 104.54 and 104.25, respectively, have already provided sufficient support. If these levels cannot hold, the 100-day SMA near 103.89 is the next best candidate.
Frequently asked questions about the banking crisis
The March 2023 banking crisis occurred when three US-based banks with heavy exposure to the tech and crypto sectors experienced a surge in withdrawals that exposed serious weaknesses in their balance sheets, leading to their bankruptcy. The highest-profile bank was California-based Silicon Valley Bank (SVB), which saw a surge in withdrawal requests due to a combination of customers fearing an FTX failure and significantly higher returns on offer elsewhere.
In order to complete the buyback, Silicon Valley Bank had to sell its holdings, mostly of US Treasuries. Due to the rise in interest rates caused by the Federal Reserve’s rapid tightening measures, however, Treasuries fell significantly in value. News that SVB had taken a $1.8 billion loss on the sale of its bonds sparked panic and precipitated a full-scale raid on the bank that ended with the Federal Deposit Insurance Corporation (FDIC) taking it over. The crisis spread to San Francisco-based First Republic, which was eventually bailed out by a coordinated effort by a group of major US banks. On March 19, Credit Suisse in Switzerland fell into liability after several years of poor performance and was to be absorbed by UBS.
The banking crisis was negative for the US dollar (USD) because 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 after it became clear what stress this was putting on the banking sector by devaluing bank holdings of US government bonds, expectations were , that the Fed will halt or even reverse the trajectory of its policy. With higher interest rates positive for the US dollar, it fell as it reduced the possibility of a policy reversal.
The banking crisis was a bullish event for gold. First, it benefits from demand due to its status as a protected asset. Second, it led investors to expect the Federal Reserve (Fed) to halt its aggressive policy of raising interest rates, fearing the impact on the financial stability of the banking system – expectations of lower interest rates reduced the opportunity cost of holding gold. Third, gold, which is priced in US dollars (XAU/USD), increased in value because the US dollar weakened.