- The US Dollar jumps higher on the back of US Retail Sales data.
- Traders are pricing in a Trump victory with the Fed keeping a lit on projections.
- The US Dollar index moves higher and trades near a pivotal level for more upside.
The US Dollar (USD) rallies on Tuesday due to Tuesday's data and several events that took place overnight. First and foremost for financial markets was the interview with US Federal Reserve (Fed) Chairman Jerome Powell, which disappointed traders hoping to hear anything on guidance, but his lips remained sealed. In Milwaukee, former US President Donald Trump took the stage after his shooting over the weekend, announcing that Ohio senator J.D. Vance will be his running mate.
On the economic front, it all revolves around the consumer, with US Retail Sales and Import/Export Prices for June being published. Retail Sales were jawbreaking with upbeat numbers for the month of June and previous revisions were all revised upwards. The US consumer looks to be back and happy to spend.
Daily digest market movers: Retail sales upbeat
- With former US President Trump picking J.D. Vance as running mate, the main theme for Trump’s campaign becomes very clear, as Senator Vance is known for his call for more harsh and severe measures against China. This means a bigger and broader tariff package against China and other countries that import goods to the US.
- The monthly Retail Sales data for June has been released, together with the Import-Export Price Index:
- Retail Sales went from 0.1% to 0.0%, with the previous 0.1% revised to 0.3%.
- Retail Sales ex Autos seen growing to 0.4% after the -0.1% in May. That same -0.1% has been revised to 0.1%.
- As usual, revisions of the previous numbers will be more important and market-moving than the actual data.
- The monthly Import Price Index went from -0.2% to 0.0%.
- The monthly Export Price Index went from -0.7% to -0.5%.
- At 14:00 GMT, the Business Inventories data for May will be released, and they are expected to remain stable at 0.3%.
- At the same time, the NAHB Housing Market Index for July will be released by the National Association of Home Builders. Previously, the Index stood at 43, with a small uptick to 44 expected.
- Equity markets are very mixed with no clear pattern, besides that, European equities are on the back foot. US futures are marginally in the green.
- The CME Fedwatch Tool shows an 89.4% chance of a 25 basic points (bps) interest rate cut by the Fed in September and 10.4% for a 50 bps cut. An unchanged scenario with no rate change is off the table.
- The US 10-year benchmark rate trades at 4.20%, flirting with the yearly lows.
US Dollar Index Technical Analysis: It all adds up
The US Dollar Index (DXY) is recovering, with traders pricing in some severe trade wars coming up should former President Trump win the elections in November. By picking J.D. Vance as his running mate, Trump has chosen a US Senator who outspokenly disfavors China and wants to limit foreign countries’ influences and imports on the US economy. Trade wars and tariffs are often seen as supportive of the US Dollar, which was the case at the start of 2018 when Trump started by slapping tariffs on Chinese imports and made the DXY rally 16% over two years with the tariffs in place.
On Tuesday, the DXY is still below all three major Simple Moving Averages (SMA) after its meltdown last week. The first barrier to recovery is the 200-day SMA at 104.37. Next, the 100-day SMA resides near 104.81, while the declining 55-day SMA is trading at 105.03.
On the downside, the weak spot has been identified now at 103.99/104.00. Expect to see pressure mounting on that level with each test. Certainly, when the DXY bounces off that level each time, the bounces' highs would become smaller until the support gives way. A technical element to look out for could be that the 55-day SMA starts to break below the 100-day SMA and/or the 200-day SMA, risking a ‘death cross’ in technical terms, which is a catalyst for a substantially longer-term sell-off.
US Dollar Index: Daily Chart
Banking crisis FAQs
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.
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.
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.
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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