US Dollar closes its weakest week since November on the back of dovish Fed

DXY Index shows resilience despite the worst weekly performance over a month, hovering at 102.60.
The US Dollar was lifted by strong S&P Global Services PMI figures from December.
Dovish bets on the Fed may limit the upward movement.

The US Dollar (USD), measured by the DXY index, is trading at 102.60, posting daily gains but marking its worst weekly performance in over a month. This movement comes on the back of strong US Services PMI data and investors’ efforts to consolidate the losses of the last three sessions.

The US Federal Reserve held a dovish stance in Wednesday’s meeting, embracing lowered inflation at the end of 2023 with no planned rate hikes in 2024 and forecasting 75 bps of easing for next year. In light of this indication, market anticipations align somewhat with the Fed's view, catalyzing risk-on flows and dampening demand for the haven Greenback.

Daily Market Movers: US Dollar gains momentum amid strong US Services PMI data

The Dollar Index (DXY) records gains, wrapping up at around 102.4. This comes after a rough week for the DXY, marking its worst weekly performance in over a month.
December saw an overall gain in the S&P Global Services PMI with 51.3, beating the consensus of 50.6 and the previous month's 50.8.
The Manufacturing PMI for December underperformed, recording 48.2 compared to the expected 49.3 and the previous 49.4. Moreover, despite expectations, December's S&P Global Composite PMI exceeded the previous 50.7, scoring 51.
The US bond yields are currently mixed, with a 2-year yield at 4.37%, slightly up, the 5-year yield at 3.90% and the 10-year yield at 3.92%, posting minor declines.
The CME FedWatch Tool indicates that markets are currently predicting the first rate cut by March 2024, further weighing on the Greenback.

Technical Analysis: DXY bears take a step back

The indicators on the DXY daily chart reflect that bearish momentum largely dominates the market despite the bears taking a breather. The Relative Strength Index (RSI) shows a downward slope in negative territory, highlighting the presence of dominant selling momentum and underscoring lackluster buying enthusiasm among traders. Furthermore, the Moving Average Convergence Divergence (MACD) shows flat red bars, indicating that the bearish momentum is present but currently on a break.

Further confirmation of the prevalent bearish bias is provided by the positioning of the Simple Moving Averages (SMAs). The index trading below its 20, 100, and 200-day SMAs inherently points towards a firm grip of sellers in the broader technical landscape.

Given the current 1.50% weekly decline in the DXY value, the current consolidation phase could be a pause of the bearish trend rather than a reversal. The short-term technical outlook remains biased to the downside.

Support levels: 101.50, 101.30, 101.00.
Resistance levels: 103.45 (20 and 200-day SMA bearish crossover), 104.50 (100-day SMA), 104.70.

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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