US Dollar resurges after brief decline with Powell pushing back against early cuts or hiking possibilities

The US Dollar consolidates in a very narrow range.
The economic calendar picks up with US PPI and Fed speakers.
The US Dollar Index retreats and flirts with a break below 105.00

The US Dollar (USD) is retreating after an initial knee jerk reaction on the back of the Producer Price Index release. The downward revisions are good enough for markets to bet on a less hot Consumer Price Index print on Wednesday. The remaining main event now is Fed Chairman Jerome Powell to hear if he supports that view and pushes back against any early initial rate cut forecasts.

On the economic front, all economic data for this Tuesday has been released. Traders can now start to position for the Consumper Price Index (CPI) release on Wednesday. With these PPI release traders will start to double down on a possible easing of CPI. That would open the door for June and lock in September as a near certainty for an initial rate cut by the Fed.

Daily digest market movers: Powell believes in steady for longer

The Qatar World Economic Forum started on Tuesday morning. Headlines from world leaders may come out throughout the week.
The US Small-Business Optimism Index for April from the National Federation of Independent Business came in at 89.7 from 88.5 in March.
At 12:30 GMT, the final reading for the Producer Price Index for April was released:
- Monthly headline PPI came in at 0.5%, coming from a revised -0.1%..
- Yearly headline PPI accelerated to 2.2% from a revised 1.8%.
- Monthly core PPI jumped to 0.5% from a revised -0.1%.
- Yearly core PPI remained stable as well at 2.4%.
The US Redbook for the week ending May 10 should be released around 12:55 GMT. The previous number was at 6%.
Two Fed speakers on the docket this Tuesday:
- Voting Federal Reserve Governor Lisa Cook did not had any main comments in her speech around 13:10 GMT.
- Federal Reserve Chairman Jerome Powell participated in a moderated discussion with the Dutch central bank Governor Klaas Knot in Amsterdam.
  - Powell pushed against a rate hike, though said steady for longer might be the outcome.
US equities are trading flat after the US Opening bell while European equities look unable to get rid of their red numbers for this Tuesday.
The CME Fedwatch Tool suggests a 91.1% probability that June will still see no change to the Federal Reserve's fed fund rate. Odds of a rate cut in July are also out of the cards, while for September the tool shows a 49% chance that rates will be 25 basis points lower than current levels.
The benchmark 10-year US Treasury Note trades around 4.46%, testing Tuesday's low

US Dollar Index Technical Analysis: Powell holds its cards closely to its chest

The US Dollar Index (DXY) trades quite stable above 105.00, though it is a bit afloat. Traders are clearly looking for direction or confirmation on what to do next for the Greenback. Rather Fed Chairman Jerome Powell or the Consumer Price Index print on Wednesday will be better moments to see where the DXY will be heading.

On the upside, 105.52 (a pivotal level since April 11) needs to be recovered, ideally through a daily close above this level, before targeting the April 16 high at 106.52 for a third time. Further up and above the 107.00 round level, the DXY index could meet resistance at 107.35, the October 3 high.

On the downside, the 55-day and the 200-day Simple Moving Averages (SMAs) at 104.54 and 104.25, respectively, have already provided ample support. If those levels are unable to hold, the 100-day SMA near 103.89 is the next best candidate.

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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