US Dollar flirts with substantial break lower with Retail Sales rolling over

The US Dollar gives away its earlier gains in the aftermath of Retail Sales.
European sovereign bond spreads ease, with French markets partially recovering from last week’s losses.
The US Dollar index trades below 105.50, facing significant support and resistance levels nearby.

The US Dollar (USD) trades in the red after being positive for the most part of this Tuesday, that was until US Retail Sales turned into a disaster. Not only did every segment miss its estimation or consensus call, the revisions are painting an even more ugly picture when it comes to consumer sentiment. With consumers feeling the pain and no longer willing to pay an arm or a leg for goods they want, question will be how long it will take before this will start hitting company earnings and overall economic indicators on the labor side.

On the US economic data front, Retail Sales are out the door now with around the corner Industrial Production and an army of US Federal Reserve speakers. Although markets have grown accustomed to the hawkish stance of the Fed. Any sudden easing would or could mean more easing in the Greenback ahead.

Daily digest market movers: More and more soft data coming in

US Retail Sales for May came in blood red as A Nightmare on Elm Street:
- Headline Retail Sales came in at 0.1% for May, missing the 0.2% consensus call. Previous number got revised from 0 to -0.2%.
- Retail Sales without transportation fell into contraction from 0.2% to -0.1%. That same 0.2% got revised down to -0.1%.
- The April numbers already gave the US Dollar a punch, and the revisions triggered a second wave of some US Dollar easing.
At 12:55 GMT, the US Redbook Index for the second week of June got released. The previous release was at 5.5%, and came in at 5.9%.
At 13:15 GMT, Industrial Production and Capacity Utilization data for May was released. Industrial Production went from 0% to 0.9%. Capacity Utilization went from 78.2% to 78.7%.
An army of Fed speakers will have comments for the markets:
- Federal Reserve Bank of New York President John Williams came out with surprise comments, saying that inflation is coming back to 2%, while the rate outlook remains data dependant.
- Federal Reserve Bank of Richmond President Thomas Barkin speaks at 14:00 GMT about the US economic outlook at a Market News International webcast.
- Federal Reserve Bank of Boston President Susan Collins will speak at 15:40 GMT at the 2024 annual meeting and 10th year anniversary of the Lawrence Partnership.
- Federal Reserve Governor Adriana Kugler participates in a conversation about the US economic outlook and monetary policy at the Peterson Institute for International Economics at 17:00 GMT.
- At the same time Federal Reserve Bank of Dallas President Lorie Logan participates in a conversation about the current state of the US economy at the Headliners Speaker Series in Austin.
- Freshly appointed Federal Reserve Bank of St. Louis President Alberto Musalem delivers a speech and participates in a moderated Q&A about the US economic outlook and monetary policy at the CFA Society St. Louis Luncheon near 17:20 GMT.
- The cherry on the cake will be Federal Reserve Bank of Chicago President Austan Goolsbee, who participates in a monetary policy discussion at the 2024 Marshall Forum on the University of Chicago campus at 18:00 GMT.
Equity are flip flopping with now the Nasdaq in the red, while the other two major US indices are in the green. In Europea both the Stoxx 50 and the German Daw are up by 0.50% on the day.
The CME FedWatch Tool shows a 40.4% chance of the Fed interest rate remaining at the current level in September. Odds for a 25-basis-points rate cut stand at 55.0%, while a very slim 4.6% chance is priced in for a 50-basis-points rate cut.
The benchmark 10-year US Treasury Note trades higher for the week, near 4.25%.

US Dollar Index Technical Analysis: When is enough?

The US Dollar Index (DXY) is seeing its safe-haven inflows abate on Tuesday with markets dialling down on their bets of political turmoil in Europe after the election outcome. With sovereign bond spreads in the Eurozone easing from their distressed levels, it looks like the Greenback might need to look somewhere else for support. Fed speakers will be holding the key as their comments might move the DXY should the hawkish stance prevail even after those softer inflation numbers.

On the upside, no big changes to the levels traders need to watch out for. The first is 105.52, where the DXY is trading around this Tuesday, which is a barrier that held during most of April. The next level to watch is 105.88, which triggered a rejection at the start of May and will likely play its role as resistance again. Further up, the biggest challenge remains at 106.51, the year-to-date high from April 16.

On the downside, the trifecta of Simple Moving Averages (SMA) is still playing support. First is the 55-day SMA at 105.11, safeguarding the 105.00 figure. A touch lower, near 104.57 and 104.47, both the 100-day and the 200-day SMA are forming a double layer of protection to support any declines. Should this area be broken, look for 104.00 to salvage the situation.

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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