- The US Dollar edges higher as markets pair back overreaction from past Friday.
- Focus turns to US ISM data before markets close early on Monday in a shortened session.
- The US Dollar Index jumps back above 103.00, right in the middle of a one-month range.
The US Dollar (USD) is comfortably in the green halfway through the European trading session as for a few European countries, the Purchasing Manager Index in the Manufacturing sector contracted even on the final reading, making the EUR/USD dip lower. Markets meanwhile remain convinced that the US Federal Reverse and its Chairman Jerome Powell will deliver only one interest-rate hike and be done with the tightening cycle, even as he said multiple times last week that the Fed is committed to do at least two. On Monday, the Greenback advances again against most currencies after the firm correction on the back of PCE numbers on Friday.
Monday features a very short trading day ahead as traders will head out for the July 4 US national holiday. Bond trading and the New York Stock Exchange (NYSE) will close at 17:00 GMT and will remain shut on Tuesday. This means that the regular economic calendar is very condensed toward the end of the week with the US Jobs report (NFP) on Friday. On Monday, a batch of data from the Institute for Supply Management (ISM) with focus on the Manufacturing sector is due at 14:00 GMT, broken down in the headline Purchasing Manager Index (PMI) and the Prices Paid, New Orders, and Employment subindexes.
Daily digest: US Dollar on edge for US ISM
- Russia will cut oil expert by 500,000 barrels per day, together with Saudi Arabia that will cut 1 million barrels per day.
- China to limit exports of metals used in chips.
- US Treasury Secretary Janet Yellen is set to head to China July 6-9 in order to underpin and build trust and collaboration between the two nations.
- The S&P Global Manufacturing Purchasing Manager Index (PMI) data for June will be released at 13:45 GMT. The PMI is expected to be unchanged from its preliminary reading at 46.3.
- The ISM Manufacturing numbers will be published at 14:00 GMT. The headline PMI is expected to come in at 47.2 from 46.9. The New Orders Index is anticipated to head higher as well, from 42.6 to 44.0.
- Equities are firmly in the green in Asia. The Hang Seng jumps over 2% near its closing bell, while Japan already closed up 1.41% on Monday. European stocks are under a bit of pressure after Apple issued a warning that it needs to cut Vision Pro Headset production forecast models because of some production issues. US Equity Futures are in the green, except for the Dow Jones futures which are slightly subdued.
- The CME Group FedWatch Tool shows that markets are pricing in a 87.4% chance of a 25 basis points (bps) interest-rate hike on July 26. The dislocation between market expectations and what the Fed has been communicating in terms of number of rate hikes is still persistent and could trigger a stronger US Dollar once markets get to the point of realisation.
- The benchmark 10-year US Treasury bond yield trades at 3.84% and is not really making any big waves this Monday. Normally it should be a steady session for the US T-notes as bond trading will stop early with the US National holiday on Tuesday.
US Dollar Index technical analysis: USD holding on as US awakes
The US Dollar is back in the green as traders are heading back into the Greenback, which is already halfway through paring back Friday’s losses. The US Dollar Index (DXY) already reclaimed 103.00 as a big figure and psychological level. In terms of positioning, it should not be a coincidence that the DXY is near the middle of a one-month-range and might stay around that point in a wait-and-hold pattern before choosing sides on the back of the US job report (NFP) on Friday.
On the upside, look for 103.54 as the next key resistance level which falls in line with the high of last week. The 200-day Simple Moving Average (SMA) at 104.94 is still quite far away. So the intermediary level to look for is the psychological level at 104.00 and May 31 peak at 104.70.
On the downside, the 55-day SMA near 102.72 has proven its importance as it clearly underpinned price action on Friday by triggering a turnaround after the firm weakening of the Greenback. A touch lower, 102.50 will be vital to hold from a psychological point of view. In case the DXY slips below 102.50, more weakness is expected with a full slide to 102.00 and a retest of June’s low at 101.92.
How is US Dollar correlated with US stock markets?
Stock markets in the US are likely to turn bearish if the Federal Reserve goes into a tightening cycle to battle rising inflation. Higher interest rates will ramp up the cost of borrowing and weigh on business investment. In that scenario, investors are likely to refrain from taking on high-risk, high-return positions. As a result of risk aversion and tight monetary policy, the US Dollar Index (DXY) should rise while the broad S&P 500 Index declines, revealing an inverse correlation.
During times of monetary loosening via lower interest rates and quantitative easing to ramp up economic activity, investors are likely to bet on assets that are expected to deliver higher returns, such as shares of technology companies. The Nasdaq Composite is a technology-heavy index and it is expected to outperform other major equity indexes in such a period. On the other hand, the US Dollar Index should turn bearish due to the rising money supply and the weakening safe-haven demand
