Home Forex The US dollar is flat in a risky Monday session ahead of US GDP, PCE and the ECB later this week

The US dollar is flat in a risky Monday session ahead of US GDP, PCE and the ECB later this week

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  • The US dollar faces mild selling pressure on Monday.
  • Traders brace for US GDP, PCE and ECB decision this week.
  • The US Dollar Index looks set to sell off as it is unable to break technical resistance.

The American dollar (USD) opens the week a bit higher. Some selling pressure emerged in Asia early Monday morning, ahead of a busy week with plenty of data points. A busy week on the macroeconomic calendar comes with no speeches from Fed officials as they are in a shutdown period ahead of the Jan. 31 rate decision.

On the economic front, the main elements will come on Thursday and Friday with the US Gross domestic product Figures (GDP) and the PCE (Personal Consumption Expenditures) price index, the Fed’s preferred measure of inflation. The European Central Bank (ECB) and its president Christine Lagarde will also decide on their monetary policy on Thursday. Until then, we’re in for a very quiet start to the week on Monday, with no major economic data points planned.

Daily overview of market movements: Calm before the storm

  • China disappointed markets this morning by leaving its key interest rates unchanged. Several market participants expected some easing to support the Chinese economy.
  • A new $20 billion plan to support Ukraine may be suspended by the EU.
  • Nasdaq futures rose sharply ahead of the opening bell in the US.
  • The US Treasury heads to markets to allocate 6-month and 3-month notes at 16:30 GMT.
  • Stock markets are on the rise, Japan is leading the rebellion. Both the Nikkei and Topix rose more than 1% near their closing bell. Markets in mainland China were the laggards, with both the Hang Seng and Shenzhen down more than 1%. The US S&P500 index reached a new all-time high during the US trading session.
  • CME’s FedWatch Tool shows markets are counting on a 100% chance the Federal Reserve will leave interest rates unchanged at its Jan. 31 meeting. Meanwhile, the Fed is in a blackout period, so officials will not communicate further until the meeting at the end of the month.
  • The benchmark 10-year U.S. Treasury note fell to 4.08%, from 4.13%. As risk appetite returns to the markets, bonds are being bought again.

US Dollar Index Technical Analysis: Risk is not in favor of DXY

The US Dollar Index (DXY) is facing significant selling pressure. The daily chart shows a third consecutive day of lower highs and lower lows. This indicates increasing selling pressure, while DXY is failing to hold ground above very important technical levels of the 200-day simple moving average (SMA) at 103.47 and the 55-day SMA at 103.28.

There are some economic data points that could still be a reason for the DXY to break through these two moving averages again and run away. Look for 104.44 as the first resistance level to the upside in the form of the 100-day SMA. If that also dissipates, nothing will keep the DXY from heading towards 105.88 or 107.20, the September high.

A bull trap appears to be underway, with US dollar bulls caught buying the greenback when it broke both the 55-day and 200-day SMAs last week. Price action could drop substantially, forcing US dollar bulls to sell their positions at a loss. This would mark DXY’s first drop to 102.60 on the uptrend line from September. Once below it, a decline is opened towards 102.00.

Risk Sentiment FAQs

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 take during a reference period. In a risk-on market, investors are optimistic about the future and more willing to buy risky assets. In a “risky” market, investors start to “play it safe” because they are worried about the future, so they buy less risky assets that are more certain to produce a return, even if it is relatively modest.

Typically, during “risk-on” periods, stock markets will rise, most commodities – except gold – will also gain in value as they benefit from a positive growth outlook. Currencies of countries that are heavy commodity exporters are strengthening due to increased demand and cryptocurrencies are rising. In the “risk on” market, bonds go up – especially large government bonds – gold shines, and safe havens like the Japanese yen, Swiss franc and US dollar all benefit.

The Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD) and smaller FX like the Ruble (RUB) and South African Rand (ZAR) all tend to rise in “risk on” markets. This is because that the economies of these currencies are heavily dependent on commodity exports for growth, and commodities tend to rise in price during periods of risk, as investors anticipate greater demand for raw materials in the future due to increased economic activity.

The main currencies that tend to rise during “risk-off” periods 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 considered safe because the world’s largest economy is unlikely to default. Only from the increased demand for Japanese government bonds, since a high share is held by domestic investors who are unlikely to issue them – even in times of crisis. Swiss franc, as strict Swiss banking laws offer investors increased capital protection.

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