US Dollar Licking Its Wounds As It Closes This Downbeat Week

The US Dollar (USD) is on track for its worst monthly performance against the Euro after the European Central Bank (ECB) and its chairman Christine Lagarde out-hawkish the US Federal Reserve (Fed). The ECB delivered a 25 basis points rate hike and committed to a hike for July, while the Fed Chairman Jerome Powell reiterated that the US central bank remains data dependent and that it will hike when it deems necessary. This split in stance on monetary policy gave the Euro wings and saw the US Dollar losing ground against some of its peers. 

On Friday, traders are assessing the Bank of Japan (BoJ) policy meeting which already took place early this morning in the ASIA PAC session and saw BoJ chairman Kazuo Ueda repeating an unchanged stance as long as the price forecast is above 2%, maintaining its policy rate at -0.1% and its 10-year JGB yield target around 0%. On the speakers front, markets will hear from three Fed members with  Jim Bullard, and Chris Waller at 11:45 and Tom Barkin at 13:00 GMT. Look for clues or any change in statements to further clarify what Jerome Powell communicated in case the Fed is not happy with the current stance of the markets, as Michigan Consumer Sentiment and Inflation expectations are to close off this trading week at 14:00 GMT in terms of economic data. 

Daily Digest: US Dollar losing interest

  • The US futures markets Chicago Mercantile Exchange (CME), Intercontinental Exchange (ICE),  and the Chicago Board Options Exchange (CBOE) and several other institutions are facing exceptionally large volumes today as ‘Quadruple Witching’ is set to take place today. ‘Quadruple Witching’ is the moment when a big bulk of options and futures contracts in several asset classes are set to expire at the same moment and will either be liquidated or rolled over. Traded volumes could be multiple times higher than normal. 
  • The US session will be key to seeing where the US Dollar closes against several of its peers. At the moment, mostly sideways price action is noted, which could result in either a recovery or more follow-through in recent moves. Seeing the fact that this is the last trading day of the week, some profit-taking in certain positions could materialize. 
  • The speaker of Russia’s Upper House of Parliament commented that an extension to the Black Sea Grain Deal is off the table. 
  • Belarus is officially taking delivery of Russian nuclear weapons. Meanwhile, NATO Secretary-General Jens Stoltenberg said it’s too early to decide on delivering the F-16 to Ukraine. 
  • Bank of Japan held its rate decision early this Friday morning with BoJ chairman Ueda keeping the central bank’s measures unchanged at -0.1% for the policy rate and the 10-year JGB yield target at 0%. Special remarks for the recent FX developments in the Japanese Yen, which was a topic of concern for the central bank and requires additional attention. 
  • Three Fed members are on the docket on Friday with Fed’s Jim Bullard to speak at the Norges Bank Conference. Fed’s Chris Waller at 11:45 will be speaking on Macroeconomic policy at the same Norges Bank event, and Fed’s Barkin at 13:00 GMT speaking out of Maryland on inflation. The speech from Jim Bullard did not hold any references to this week’s monetary policy or personal views as a Fed member on the current monetary approach for the US. 
  • A rather quiet close of the week with only the University of Michigan numbers this Friday at 14:00 GMT, with the Sentiment expected at 60, coming from 59.2, and Current Conditions expected to come in at 65.1, climbing higher from the 64.9 previous. A big focus on the inflation expectations as well with the 1-year inflation expectations sliding lower from 4.2% to 4.1%. The 5-year to 10-year expectations are 10 basis points lower from 3.1% to 3.0%. 
  • The China Hang Seng stock market added another 1% gain to its winning streak and nearly closed at a one-month high, while Japan’s Topix index closed just below its 33-year high. Meanwhile, the tailwind is picking up speed in Europe as well with the German DAX printing a new all-time high and US equity futures nearly flat for the day. 
  • The CME Group FedWatch Tool shows that markets are pricing in a 71.9% chance of a 25 basis point (bp) hike on July 26th.  Overall, the point of view here seems to be just one more hike and done as all other futures for 2023 are pointing to an unchanged rate level. Nevertheless, with the data dependency of the Fed, there could be a dislocation between the Fed policy and market expectations, possibly undervaluing the Greenback currently, which could trigger US Dollar strength later this year. 
  • The benchmark 10-year US Treasury bond yield trades at 3.71%, back lower as bonds are in favor again. The 10-year yield was trading around 3.83% before dropping substantially toward 3.70% as the ECB outpaced the Fed with its forward guidance. 

US Dollar Index Technical Analysis: A Long Way To Go For Recovery

The US Dollar has taken a firm step back against a few of its peers, while it tries to cling on to gains against some Asian currencies. This mixed bag of performances triggers a mild uptick in the US Dollar Index (DXY) this Friday morning. After the substantial slide lower on Thursday from 103 to nearly 102 it looks to try and hold above 102 before the weekly close. 

On the upside, a whole other ballpark now as the 55-day Simple Moving Average (SMA) at 102.55 has turned from support into resistance. Should the DXY recover further today, look for the 103 psychological level as the next big challenge to the upside. The high of May at 104.70 remains the ultimate target longer term. 

On the downside, the psychological level near 102 is the only element upholding DXY for now. Once price action should start to reside below it, expect to see another nosedive move for the US Dollar Index toward 100.82. That means a challenge for the low of this year and means a substantial devaluation for the Greenback to come. 

What is US Dollar Index (DXY)?

The US Dollar Index, also known as DXY or USDX, is a benchmark index that was established by the US Federal Reserve in 1973. DXY is widely used as a tool for measuring the US Dollar (USD) value in global markets. The index is calculated by measuring the US Dollar’s performance against a basket of six foreign currencies, the Euro, the Japanese Yen (JPY), Swedish Krona (SEK), the British Pound (GBP), the Swiss Franc (CHF) and the Canadian Dollar (CAD).

With 57.6%, the Euro has the biggest weight in the index followed by the JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), and CHF (3.6%). Hence, a sharp decline in the EUR/USD pair could help the US Dollar Index rise even if the US Dollar weakens against some of the other currencies in the basket.

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