US Dollar strengthens as tensions in the Middle East weigh risk appetite
|- The USD rallies favoured by its safe-haven status.
- This week, a dovish turn by the Federal Reserve might halt US Dollar’s recovery.
- DXY has scope for further recovery past 104.55, aiming for 105.15.
The US Dollar (USD) has opened the week on a somewhat firmer pace to hit its highest levels in more than two weeks. Market concerns about the escalating tensions in the Middle East have shadowed investors' hopes of a Fed dovish turn later this week.
Israel has launched drone strikes in Lebanon after a deadly rocket attack in the Golan Heights this weekend, boosting concerns about a full-blown regional war that would involve the regional power, Iran.
Geopolitical concerns are overshadowing the fundamental docket, especially Wednesday’s Federal Reserve’s (Fed) monetary policy meeting. The Fed is likely to keep rates unchanged but investors are expecting a dovish turn in the bank’s rhetoric, acknowledging the cooling inflation trends and hinting towards a rate cut in September.
Before that, the JOLTS Job Openings for June and the Conference Board’s Consumer Sentiment Index for July, due on Tuesday, are expected to show moderate contractions, which will provide the right framework for a dovish message from the central bank.
Daily digest market movers: US Dollar appreciates on a frail market sentiment
- In the absence of key fundamental releases on Monday, market concerns of an escalation in the Middle East are likely to weigh risk appetite and provide support for the US Dollar due to its safe-haven status.
- On Tuesday, the US Conference Board’s Consumer Sentiment Index is expected to show a moderate decline to 99.5 from 100.4 in the previous month.
- US JOLTS Job Openings are seen to have eased to 8.03 million in June from 8.14 million in May.
- Future markets are pricing only a 4.1% chance of an interest rate cut by the Fed on Wednesday, with a 25 bps rate cut fully priced for September, according to the CME Group Fed Watch Tool.
- Data seen last week showed that the US Personal Consumption Expenditures (PCE) Prices Index remained sticky in June, yet with the core PCE index at 2.6% year-over-year, which kept hopes of a September rate cut alive.
- Earlier in the week, the US Gross Domestic Product (GDP) surprised with a 2.8% yearly growth in the second quarter, from 1.4% in the first, but still far from the growth levels seen in the second half of 2023.
DXY Technical Outlook: The Dollar breaks the top of the range, at 1.0455
The bearish trend sewn in the first half of the month is losing momentum. The 4-hour chart shows RSI returning above the 50 line, with price action testing resistance at 104.55.
Fundamentals are supportive, and the strong rebound from the 104.05 support area on Monday suggests that there is scope for a further recovery.
A confirmation above 104.55 would shift bulls' focus towards 105.10, ahead of 105.80. Supports are the mentioned 104.05 and 103.60.
US Dollar PRICE Today
The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the strongest against the Euro.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.37% | 0.27% | 0.14% | 0.04% | 0.05% | 0.32% | 0.18% | |
| EUR | -0.37% | -0.12% | -0.23% | -0.31% | -0.26% | -0.06% | -0.17% | |
| GBP | -0.27% | 0.12% | -0.14% | -0.21% | -0.15% | 0.08% | -0.04% | |
| JPY | -0.14% | 0.23% | 0.14% | -0.14% | -0.07% | 0.18% | 0.07% | |
| CAD | -0.04% | 0.31% | 0.21% | 0.14% | 0.05% | 0.26% | 0.17% | |
| AUD | -0.05% | 0.26% | 0.15% | 0.07% | -0.05% | 0.25% | 0.10% | |
| NZD | -0.32% | 0.06% | -0.08% | -0.18% | -0.26% | -0.25% | -0.12% | |
| CHF | -0.18% | 0.17% | 0.04% | -0.07% | -0.17% | -0.10% | 0.12% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
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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