US Dollar consolidates while G20 meets on Ukraine in Brazil on very calm Monday

The Greenback goes nowhere after a rather soft start in Asia on Monday.
All eyes are on geopolitics after the Biden Administration delivered the green light for Ukraine to use long-range US missiles for targets in Russia.
The US Dollar index holds ground above 106.50 for now while the economic calendar is rather flat for this Monday.

The US Dollar (USD) holds ground at rather elevated levels on Monday with a very calm start of the week, with the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, slightly in the red near a fresh year-to-date high reached last Thursday above 106.50. The main driver for the currency on Monday is the green light from the Biden Administration on Sunday for Ukraine to use long-range US missiles to target Russian infrastructures within Russian borders, just ahead of the G20 meeting in Rio De Janeiro this Monday.

The US response comes after Moscow deployed nearly 50,000 troops to Kursk, the southern Russian region. Reporting on that, “the change comes largely in response to Russia's deployment of North Korean ground troops to supplement its own forces, a development that has caused alarm in Washington and Kyiv,” Reuters said.,.

The US economic calendar is very light this Monday. Besides a speech by Federal Reserve Bank of Chicago President Austan Goolsbee, nothing really market moving on the docket. Markets will instead look out for the G20 meeting and comments around Ukraine.

Daily digest market movers: Looking for a solution

It is a very calm start to the week, and all eyes will shift to Rio de Janeiro in Brazil for the G20 summit, where Ukraine will be high on the calendar. Headlines around Ukraine started to pick up again last Friday when German Chancellor Olaf Schultz had a phone call with Russian President Vladimir Putin after nearly two years of radio silence. Over the weekend, Russia launched its biggest missile and drone attack thus far in this conflict. In response, the US Biden administration provided a green light for Ukraine to use long-range US missiles to target tactical infrastructure within Russia.
At 15:00 GMT, Federal Reserve Bank of Chicago President Austan Goolsbee delivers welcome remarks at the Financial Markets Group annual conference in Chicago.
The National Association of Home Builders (NAHB) will release its monthly Housing Market Index for November at 15:00 GMT. The expectation is for a slight increase to 44 compared to 43 previously.
Equities are slipping lower ahead of the US trading session with European and US equities trading in red numbers, overall less than 1% negative.
The CME FedWatch Tool is pricing in another 25 basis points (bps) rate cut by the Fed at the December 18 meeting by 61.9%. A 38.1% chance is for rates to remain unchanged. While the rate-cut scenario is the most probable, traders have significantly pared back some of the rate-cut bets compared with a week ago.
The US 10-year benchmark rate trades at 4.47%, just off the high printed on Friday at 4.50%

US Dollar Index Technical Analysis: Fade or not?

The US Dollar Index (DXY) has undergone market repricing on President-elect Donald Trump having secured his presidential victory and gaining control of the House of Representatives and the Senate. For now, it looks like the past weeks’ moves have topped out and will start to ease a touch. levels seen before heading into the US Presidential Elections two weeks ago.

After a brief test and a firm rejection last Thursday, the 107.00 round level remains in play. A fresh yearly high has already been reached at 107.07, which is the static level to beat. Further up, a fresh two-year high could be reached if 107.35 gets taken out.

On the downside, a fresh set of support is coming live. The first support is 105.93, the closing level on November 12. A touch lower, the pivotal 105.53 (April 11 high) should avoid any downturns towards 104.00.

US Dollar Index: Daily Chart

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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