US Dollar keeps it together despite appreciating Euro on stalemate in French elections

The US Dollar a touch softer at the start of the first week of July.
A very full US economic calendar ahead, with the US Jobs Report as dessert.
The US Dollar index retreats to the mid-105.00 level.

The US Dollar (USD) sees the Euro running away a bit on Monday after the first round of the French government elections took place. A clear victory for Marine Le Pen and her far-right party Rassemblement National (RN), though a stalemate could be at hand. None of the three major parties – Marine Le Pen’s far-right Rassemblement National, Emmanuel Macron’s centric Ensemble Citoyens, and Jean-Luc Mélenchon’s far-left Nouveau Front Populaire – have reached their projected results as of the latest polls. Both the far left and the far right parties have reached less positive results, as the latest polls on Friday suggested, while Macron’s party was able to salvage the situation a bit, though still coming in third, which means no one holds a majority and a stalemate could be at hand.

On the US economic calendar front, US traders will have little time to digest the French election news, with already some nice data points ahead on Monday as the Institute for Supply Management is gearing up for its June numbers on Manufacturing. Additionally, the European Central Bank (ECB) is holding its European Jackson Hole version, with its annual symposium in Sintra, Portugal, with many comments and interviews expected from several central bank members from across the globe.

Daily digest market movers: Not a quiet week at all

The annual three-day European Central Bank Symposium starts in Sintra, Portugal, and lasts until Wednesday. ECB president Christine Lagarde will deliver a speech and opening remarks. More headlines are expected throughout these three days, with several central bank members and policymakers to be interviewed and making comments.
At 13:45 GMT, S&P Global will release June’s Purchasing Managers Index (PMI) for the Manufacturing sector’s final reading. The previous reading was 51.7, and no changes are expected.
At 14:00 GMT, the Institute for Supply Management will release June’s PMI Index:
- Manufacturing PMI is seen heading to 49 from 48.7.
- The New Orders Index was at 45.4 in May, with no forecast available for June.
- The Employment Index was previously at 51.1, with no consensus view available.
- The Prices Paid Index is seen declining to 55.9 from 57.
Equities are roaring and rallying higher with this French election gridlock result going into next week’s voting. Certainly, in Europe, all indices are popping higher by over 1%, while US equity futures are enjoying the positive spillover effect.
The CME Fedwatch Tool is broadly backing a rate cut in September despite recent comments from Federal Reserve (Fed) officials. The odds now stand at 57.8% for a 25-basis-point cut. A rate pause stands at a 35.7% chance, while a 50-basis-point rate cut has a slim 6.5% possibility.
The US 10-year benchmark rate trades near 4.41%, which is very close near the 4.42% high this Monday, on the back of the French election news.

US Dollar Index Technical Analysis: Containing losses for now

The US Dollar Index (DXY) is facing headwinds from its biggest contributor in the Index, the Euro, which accounts for 57.6% of the total package. The appreciation of the Euro is pushing the Greenback in the fences already on early Monday trading. With the sword of Damocles still hanging over the US Dollar, from possible intervention from the Ministry of Finance from Japan, the DXY could be gearing up for one of its biggest corrections for this year.

On the upside, the pivotal level of 105.89 must be regained first. The DXY failed to stay above that level last week. Once above there, marching above the red descending trend line in the chart below at 106.26 and the peak of April at 106.52 are the two main resistances ahead of a fresh nine-month high. That would be reached once 107.35 is being broken to the upside.

On the downside, 105.53 is the first support ahead of a trifecta of Simple Moving Averages (SMA). Next down is the 55-day SMA at 105.25, safeguarding the 105.00 round figure. A touch lower, near 104.73 and 104.45, both the 100-day and the 200-day SMA form a double layer of protection to support any declines together with the green ascending trendline from last December.

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.

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.