Market news

12 February 2024

US Dollar has softer opening on Monday ahead of Tuesday’s CPI

  • The US Dollar opens up a touch softer despite some turmoil over the weekend. 
  • Traders are looking forward to the main event this week on Tuesday with US CPI numbers. 
  • The US Dollar Index still trades at 104 and could drop substantially lower if disinflation continues. 

The US Dollar (USD) is heading a touch softer this Monday morning despite two main elements that were making the news over the weekend. First and foremost were the controversial comments from former US President Donald Trump who said he would “encourage” Russia any North Atlantic Treaty Organization (NATO) country that did not meet its financial contribution to NATO.

Trump’s comments triggered panic across Europe since it is a sign the US could possibly fully retract its support for Ukraine if Trump gets elected. The second chunk of geopolitics to impact markets was the assault on Rafah by the Israeli army, which has surrounded the city and is trying to eliminate any remaining Hamas strongholds. 

On the economic front, an already juicy start to the week beckons with no less than two US Federal Reserve members making an appearance. Traders though will try to keep their powder dry for the main event on Tuesday with the US Consumer Price Index numbers for January scheduled for release. Past Friday’s revisions, using a new calculation method, pointed to more disinflation. So any further disinflation would mean some US Dollar weakness ahead. 

Daily digest market movers: CPI on our minds

  • A $95 billion aid bill for Ukraine, Israel and Taiwan received enough support to be moved forward for voting through the US Senate. 
  • Several European heads of state have already condemned the comments from former US President Trump on Russia and its free pass to enter Europe in case Trump got elected. 
  • Michelle Bowman, who is a governor at the US Federal Reserve, is due to speak near 14:20 GMT.
  • The US Treasury is heading to markets this Monday with an auction with a consignment of 3-month and a 6-month Bills near 16:30. 
  • US Minneapolis Fed Neel Kashkari is set to speak near 18:00. 
  • The Financial Management Service is due to release the Monthly Budget Statement, with expectations for January of $-21 billion, from $-129 billion previously. 
  • Equity markets are a bit clueless this Monday, not really storming out of the gates. Biggest element to point out this Monday is that China is closed this week due to the holiday period. 
  • The CME Group’s FedWatch Tool is now looking at the March 20th meeting. Expectations for a pause are 82.5%, while 17.5% for a rate cut. 
  • The benchmark 10-year US Treasury Note trades near 4.17%, at the start of this Monday. 

US Dollar Index Technical Analysis: Technical easing ahead

The US Dollar Index (DXY) is showing fatigue – that was the broad takeaway from the technical analysis from Friday. With several falls breaks and even a firm decline on Friday against the 100-day Simple Moving Average (SMA) at 104.26, is the writing on the wall for US Dollar bulls saying they are not willing to go the extra mile to push the DXY higher. Expect some retreat, which would fall in line if CPI numbers on Tuesday reveal disinflation. This could see the DXY head to either the 200-day SMA (103.63) or the 55-day SMA (103.02).

Should the US Dollar Index move higher again, first look for a test at the peak of last week Monday, near 104.60. That level needs to be broken and is more important than the 100-day Simple Moving Average snap at 104.26. Once broken above last Monday’s high (February 5), the road is open for a jump to 105.00 with 105.12 as key levels to keep an eye on. 

The first ideal candidate for support is the 200-day SMA near 103.63. Should that give way, look for support from the 55-day SMA near 103.02 itself. Should those fail, look for 102.00 as a big figure to do the necessary. 

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

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.

What are the key assets to track to understand risk sentiment dynamics?

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.

Which currencies strengthen when sentiment is "risk-on"?

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.

Which currencies strengthen when sentiment is "risk-off"?

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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