US Dollar books gains on the back of ECB
|- The US Dollar is in the green and is set for weekly gains.
- ECB Lagarde dropped the ball and the Euro got punished.
- The US Dollar Index stronger as PPI and Retail sales surprise to the upside.
The US Dollar (USD) firmly above 105 in the US Dollarindex (DXY) and has the ECB to thank for that. Although the European Central Bank hiked 25 basis points, markets are crushing the Euro. Reason is that recent economic data pointed to a deteriorating economy, which now could even crash as the ECB sticks to getting inflation down to 2%, no matter what.
Meanwhile Producer Price data and Retail sales all soared higher above expectations. This points to even more the divergence between Europe and the United States: US is in the lane for a soft landing, while Europe is crashing. Question is how hard it will crash.
Daily digest: US Dollar outpaces Euro
- The main takeaway from the ECB meeting where Christine Lagarde spoke was a very nervous ECB president who refrained responding to the question if the ECB is done hiking now. The ECB has hiked as it was undershooting its attempt to get inflation to 2% by 2025. It became clear that the decision was not an easy one and that there was a vote split on wether to hike or not.
- Just minutes after the ECB central bank decision, Spanish Economic minister Nadia Calviño, came out demanding it will be the last rate hike from the ECB as Spanish economic indicators are deteriorating quickly.
- Just hours before the ECB rate decision, the Chinese People's Bank of China (PBoC) has cut its Reserve Requirements Ratio by 0.25%. The Yuan eases a touch against both Euro and US Dollar. The cut was expected by analysts and does not trigger any big market movements.
- Big fireworks are expected on Thursday from both the macroeconomic and central bank corners.
- The European Central Bank hiked 25 basis points to 4%.
- The Producer Price Index (PPI) jumped in all components above expectations. Aspecially the final PPI went from 0.3% to 0.7% on a monthly basis. On the yearly basis, overall went from 0.8% to 1.6%. Without Food and energy, the monthly level went from 0.3% to 0.2%, and yearly from 2.4% to 2.2%.
- Retail Sales went lower, while revisions went lower as well, pointing to substancial support. The Retail Sales overall went from 0.7% to 0.6% with the previous revised to 0.5%. Without car and gas, sales went from 1.0% to 0.2%, with the latest revised to 0.7%.
- The macroeconomic calendar ended its day at 14:00 GMT, with US Business inventories data for July which stayed at 0.0%.
- Asian equities are overperforming this Thursday, with both Japanese and Chinese indices in the green. Equities are heading higher with Firm gains for the FTSE 100, up over 1.5%.
- The CME Group FedWatch Tool shows that markets are pricing in a 97% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September after the recent US inflation numbers.
- The benchmark 10-year US Treasury bond yield trades at 4.25% and is taking a small step back as the volume of new debt issuances is slowing down a touch.
US Dollar Index technical analysis: Euro helps DXY above 105
The Greenback’s moves on Thursday will largely depend on where the Euro will head to. The ECB rate decision will have a binary impact on the US Dollarindex (DXY) once all data is out and markets have decided if the ECB rate decision was hawkish or dovish. Expect to see a very volatile window between 12:00 GMT and 14:00 GMT with possibly no real direction to be found until after all the dust has settled.
The new high to watch is at 105.16, both the high from last Thursday and a six-month high. The US Dollar Index first needs to gain back its lost territory from this Monday and break above the high of 104.93. Beyond 105.16, the next level to watch is 105.88, the high of 2023.
On Monday, 104.44 kept it together and refrained from allowing the DXY from selling off any further. The high of August 25 did its job and acted as a pivotal level. Should the uptick from this Tuesday reverse and 104.44 gives way, a substantial downturn could take place to 103.04, where the 200-day SMA comes into play for support.
Banking crisis FAQs
What happened during the Banking Crisis?
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.
How did Silicon Valley Bank spread the banking liquidity crisis?
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.
What was the impact of the Banking Crisis on the US Dollar?
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.
What was the impact of the Banking Crisis on the price of Gold?
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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