US Dollar marginal in the green as US equity session turns red
|- US Dollar jumped higher as a flight to safe havens rolls through the markets, but is back at square on as the US session has started.
- US debt-ceiling talks in stalemate while CME Fed futures are at 50% for another hike in July.
- US Dollar Index flirting with 104 as a new high for April and May is being printed on the quote board.
The US Dollar (USD) is paring back part of its earlier gains against most pairs after hitting a new two month high on the back of some flight to safe havens. White House and republicans plan to remuse debt talks on Wednesday, while the 1st of June is approaching fast. Markets meanwhile will look for further info from US Treasury Secretary Yellen who is due to speak at 14:00 GMT in front of the House Financial Service Commmittee.
On the macroeconomic data front, some fireworks are expected in the US session with Fed’s Waller due to speak and the FOMC Minutes from the latest meeting to be released at 18:00 GMT. Traders will want to see the voting behaviour and discussion points that have been put on the table in the last meeting in order to assess if another rate hike in July is plausible. Meanwhile concerns rise for the US inflation and Fed response on the back of UK inflation hitting a 30 year high in Europe.
Daily digest: US Dollar gearing up for FOMC Minutes, Yellen and US Debt ceiling talks
- GOP negotiator Graves said no progress yet.
- PIMCO said to expect a debt ceiling deal before JUne 1st and not until the 11th hour.
- McCarthy confirms talks will continue this morning and talks up to today were still productive.
- US MBA's mortage applications index fell 4.6% last week.
- European equities take a turn for the worse just hours away from the start of the US trading session, triggering a flight to safe haven assets like the Greenback, Japan's Yen and Germand bonds and US Treasury bills.
- Talks about the US debt ceiling remain unchanged while both the White House and GOP plan to continue on Wednesday.
- On Tuesday, Richmond Fed Manufacturing Index contracted to -15 from -10. Business Conditions bounced a little to -17, coming from -27.
- US S&P Global May Flash Services PMI came at 55.1 vs 53.6 from April. The Flash Composite PMI printed 54.5 vs 53.4 in April, and the Flash Manufacturing PMI came at 48.5 vs 50.2 in April.
- US Credit Default Swaps (CDS) jump higher and are nearing the peak of last Wednesday.
- US equity futures in the red as European equities drag them lower with the VIX near 20. S&P 500 leading the decline with the Dow Jones below -0.50%.
- The CME Group FedWatch Tool shows that markets are pricing in a 50% chance of rate hike for July after hawkish comments from Federal Reserve officials Jim Bullard and Neal Kashkari. Rate cuts have moved down the line, to as early as November 2023. The FOMC Minutes later this Wednesday at 18:00 GMT could lock in the rate hike for the July meeting.
- The benchmark 10-year US Treasury bond yield trades at 3.67% and eases a little bit in yield as US and German bonds jump higher.
US Dollar Index technical analysis: Giving back intraday gains
The US Dollar Index (DXY) has taken out both the 55-day and the 100-day Simple Moving Averages (SMA), respectively, at 102.45 and 102.85 on the upside. A new high got printed briefly for the past two months, but contracts a touch on Wednesday with the impasse in Washington on the talks to sort out the debt ceiling.
On the upside, 105.75 (200-day SMA) still acts as the price target to hit, as the next upside key level at 104.00 (psychological, static level) acts as an intermediary element to cross the open space.
On the downside, 102.85 (100-day SMA) aligns as the first support level to confirm a change of trend. In the case that breaks down, watch how the DXY reacts at the 55-day SMA at 102.48 in order to assess any further downturn or upturn.
Dow Jones FAQs
What is the Dow Jones?
The Dow Jones Industrial Average, one of the oldest stock market indices in the world, is compiled of the 30 most traded stocks in the US. The index is price-weighted rather than weighted by capitalization. It is calculated by summing the prices of the constituent stocks and dividing them by a factor, currently 0.152. The index was founded by Charles Dow, who also founded the Wall Street Journal. In later years it has been criticized for not being broadly representative enough because it only tracks 30 conglomerates, unlike broader indices such as the S&P 500.
What factors impact the Dow Jones Industrial Average?
Many different factors drive the Dow Jones Industrial Average (DJIA). The aggregate performance of the component companies revealed in quarterly company earnings reports is the main one. US and global macroeconomic data also contributes as it impacts on investor sentiment. The level of interest rates, set by the Federal Reserve (Fed), also influences the DJIA as it affects the cost of credit, on which many corporations are heavily reliant. Therefore, inflation can be a major driver as well as other metrics which impact the Fed decisions.
What is Dow Theory?
Dow Theory is a method for identifying the primary trend of the stock market developed by Charles Dow. A key step is to compare the direction of the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) and only follow trends where both are moving in the same direction. Volume is a confirmatory criteria. The theory uses elements of peak and trough analysis. Dow’s theory posits three trend phases: accumulation, when smart money starts buying or selling; public participation, when the wider public joins in; and distribution, when the smart money exits.
How can I trade the DJIA?
There are a number of ways to trade the DJIA. One is to use ETFs which allow investors to trade the DJIA as a single security, rather than having to buy shares in all 30 constituent companies. A leading example is the SPDR Dow Jones Industrial Average ETF (DIA). DJIA futures contracts enable traders to speculate on the future value of the index and Options provide the right, but not the obligation, to buy or sell the index at a predetermined price in the future. Mutual funds enable investors to buy a share of a diversified portfolio of DJIA stocks thus providing exposure to the overall index.
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