The US Dollar (USD) is attempting to recover some ground following a tumultuous week. In which the Greenback received no reprieve at all. At one time, it looked like everything was working against the US dollar. With many inverse correlations kicking in. The stock market has surged throughout the week, putting a goldilocks scenario on the table in which US rates continue to fall. Equities continue to rise, and the Greenback is left to pay the price by depreciating even further.
On the economic front, there is just one critical factor to watch that might make or break the slight rebound observed. In the US Dollar during the European trading day. Consumer Services at the University of Michigan Sentiment may either provide some comfort or spark. Another round of US Dollar selling, pushing the US Dollar Index below 100.00 for the first time. Since November 2022. As a potential trigger, the Michigan survey’s inflation expectations component will be critical.
The US Dollar foots the bill for the equities surge
Early on Friday, Christopher Waller of the Federal Reserve Board of Governors reaffirmed. That the Fed must continue to battle inflation and maintain tight policy for some time.
The Japanese Yen merits some attention as the Japanese tiger roars again. Hitting an eight-week high versus the US dollar.
The sole meaningful datapoint for this Friday is at 14:00 GMT. Keep a look out for the July Michigan Consumer Sentiment Index. The index is anticipated to climb from 64.4 to 65.5 points. As a result, that figure should have no market impact. Traders will instead look for inflation forecasts, both short and long term, to have a greater effect on whether the US Dollar Index rises or falls this week.
Equities throughout the world are taking it easy this Friday, with the Japanese Topix down -0.17% and the Chinese Hang Seng up +0.33%. For the latter, some bad news came in the form of China’s pledge to simply give assistance packages for select areas of the global economy, but no actual help. A significant assistance package or quantitative easing will be implemented.
Halfway through the European day, European and US equities futures are flat. Although the goldilocks scenario is popular, earnings season might throw a wrench in the works for that straight line up to a new all-time high.
According to the CME Group FedWatch Tool, markets are pricing in a 94.9% possibility of a 25 basis point (bps) interest rate increase on July 26. Based on the relatively low percentages that scenario receives for the last Fed meetings later this year, a second-rate rise appears to be out of the question.
The benchmark 10-year US Treasury note yield is currently at 3.97% and is rising. From 4.09% last week, the rate has been steadily declining. Traders are betting big on the goldilocks scenario, in which the Fed stops raising and may even drop rates sooner than expected, resulting in a major boom in the economy and stock market.
Technical Analysis
The US Dollar has had its worst week since a steep drop in November of last year. The US Dollar Index has lost about 2.5% of its value this week, with significant losses versus. The Japanese Yen (USDJPY), Euro (EURUSD), and Swiss Franc (USDCHF). As the DXY has fallen below 100.00. A weekly closing above the large figure might raise expectations. That the Greenback can yet recover some of its losses.
In In such a circumstance, expect for 102.73 to act as resistance. At the 55-day Simple Moving Average (SMA). Which will regain some of its relevance after being cut up so much a few weeks ago.
The 100-day SMA is only a few inches above the 55-day SMA at 102.82, which might provide a strong region of resistance between both moving averages. If the DXY passes through that range, the July high of 103.57 will be the mark to monitor for a further breakthrough.
On the downside, bears of the US Dollar will attempt to take price action toward 99.42 as the next significant technical support, which if violated would signal a new 18-month low for the DXY. Just underneath that, the weekly chart shows the 200-day SMA at 98.25, which is the next critical key to stop any selloffs. Although the price action is now below 100.00, a minor uptick is possible.
