- The DXY index surged, trading with gains above the 200-day SMA at 103.70.
- Growing tensions between Israel and Hamas made investors seek refuge in the USD.
- Key US economic reports due this week: ISM Services PMI, ADP Employment Change, November Nonfarm Payrolls and the Unemployment Rate.
The US Dollar (USD) edged higher on Monday, with the Dollar Index (DXY) sailing past the 103.70 mark, above the 200-day Simple Moving Average (SMA) and pushing a sour market mood amid rising Treasury yields.
For the rest of the week, key drivers are on the horizon as investors eye Friday's release of Nonfarm Payrolls for November alongside the Unemployment Rate, while the ISM Services PMI is due on Tuesday and the Automatic Data Processing (ADP) Employment Change report on Wednesday.
Despite mixed signals from the US labour market and cooling inflation in the United States economy, Federal Reserve (Fed) officials indicated a possibility for further policy tightening, signifying a subtly hawkish stance. This week’s key labour market data will influence the modelling of expectations and the Fed's policy trajectory, which could define the short-term trajectory of the US Dollar.
Daily Market Movers: US Dollar on the rise ahead of labor market data
- The US Dollar is currently trading with gains, with the DXY Index showing a positive upward trend neatly tucked above 103.70.
- The US Dollar's upward trend appears largely driven by a sour market mood and rising bond yields.
- No significant reports have surfaced during the session that could impact the US Dollar's current trajectory.
- Market participants have their eyes set on key economic reports due this week. On the list are the Nonfarm Payrolls, the Unemployment Rate, ADP Employment Change and the ISM Services PMI updates, scheduled for release on Friday, Wednesday and Tuesday, respectively.
- Overall, all reports are expected to show that the job creation picked up in November, while the ISM Services PMI is seen accelerating regarding its last reading of October.
- US bond yields are edging higher, aligning with the Dollar's uptick. Specifically, the 2, 5 and 10-year yield rates are up, trading at 4.65%, 4.24%, and 4.29%, respectively.
- The CME FedWatch Tool indicates no hikes are priced in for the upcoming December meeting, and markets speculate on rate cuts in mid-2024.
Technical Analysis: US Dollar struggles amid negative territory RSI and subdued SMAs
The indicators on the daily chart are reflecting a predominance of selling momentum. The index position, below the 20 and 100-day Simple Moving Averages (SMAs), indicates that the bears are maintaining control. This control is also noticeable from the Relative Strength Index (RSI), which shows a positive slope but remains in negative territory. This reveals that although buyers are gaining some strength, they are yet to overpower the sellers.
Meanwhile, the Moving Average Convergence Divergence (MACD) signifies decreasing red bars, adding further evidence of shrinking selling momentum. This deceleration is credited to the bears taking a breather after driving the index to its lowest level since last August.
.
Support levels: 103.60, 103.30, 103.15, 103.00.
Resistance levels: 104.10 (20-day SMA), 104.40 (100-day SMA), 104.50.
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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