US Dollar steady with Fed rate pendulum swinging from big cut to nearly no cut for November

The US Dollar in calm regime on Monday, though still at elevated levels near last week’s high.
Tensions in the Middle East keep lingering while traders gear up for the Fed Minutes and US CPI release later this week.
The US Dollar Index trades above 102.00, with traders fretting over whether to send the DXY towards 103.00.

The US Dollar (USD) is having a very soft start of the week, going sideways on Monday, with the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, hovering around 102.50. While traders are bracing for the US Federal Reserve (Fed) Minutes and the US Consumer Price Index (CPI) release for September later this week, no less than four Fed speakers are lined up to guide markets toward November’s rate decision on Monday.

The economic calendar is light on Monday, with only the Consumer Credit Change for August on the docket in terms of numbers. Later this week, the US CPI on Thursday will be the main driver for the US Dollar. Markets are still assessing whether the US economy is in a soft landing, a Goldilocks scenario, or rather in a recession outlook.

Daily digest market movers: Headline by headline

There is no agreement or green light from US President Joe Biden on the question from Israel to attack Iranian oil fields. The Biden administration did not deliver a firm no, but on Friday, President Biden told Bloomberg that he would be thinking about alternatives other than striking oil fields.
Consumer Credit Change for August is due at 19:00 GMT, with expectations to see a drop to $12 billion from $25.45 billion in July.
Four Fed speakers are lined up on Monday:
- At 17:00 GMT, Federal Reserve Governor Michelle Bowman participates in a fireside chat about banking regulation at the Independent Bankers Association of Texas (IBAT) annual convention in San Antonio, Texas.
- Near 17:50 GMT, Federal Reserve Bank of Minneapolis President Neel Kashkari participates in a Q&A and moderated discussion at the Bank Holding Company Association's (BHCA) Fall Seminar in Edina, MN.
- At 22:00 GMT, Federal Reserve Bank of Atlanta President Raphael Bostic moderates a conversation about the business of professional spots as part of the Atlanta Fed's Leading Voice series.
- Closing off the Monday, near 22:30 GMT, Federal Reserve Bank of St. Louis President Alberto Musalem delivers a speech about the US economy and monetary policy in a Money Marketeers event at New York University.
European markets are off this Monday's low and are even turning flat to mildly positive on the day. US equity indices are still struggling with negative numbers.
The CME Fedwatch Tool shows a 93.1% chance of a 25 basis point (bps) interest rate cut at the next Fed meeting on November 7, while 6.9% is pricing in no rate cut. Chances for a 50 bps rate cut have been fully priced out now.
The US 10-year benchmark rate trades at 4.002%, a fresh 30-day high.

US Dollar Index Technical Analysis: Pendulum swings

The US Dollar Index (DXY) has sprinted higher at a speed that brings Usain Bolt instantly to mind. With a 50 bps rate cut fully priced out and chances for no rate cut starting to grow in possibility, the pendulum may have swung a bit too far and too quickly. Expect the DXY set to ease a touch and look for support before the next directional move.

The psychological level of 103.00 is the first big number to tackle on the upside. Further up, the chart identifies 103.18 as the very final level for this week. Once above there, a very choppy area emerges with the 100-day Simple Moving Average (SMA) at 103.34, the 200-day SMA at 103.76, and the pivotal 103.99-104.00 levels in play.

On the downside, the 55-day SMA at 102.03 is the first line of defence, backed by the 102.00 round figure and the pivotal 101.90 level as support to catch any bearish pressure and trigger a bounce. If that level does not work out, 100.62 also acts as support. Further down, a test of the year-to-date low of 100.16 should take place before more downside. Finally, and that means giving up the big 100.00 level, the July 14, 2023, low at 99.58 comes into play.

US Dollar Index: Daily Chart

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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