The initial buzz around a potential rebound for the US Dollar was short-lived as those gains vanished just before the US stock market started trading. The buzz centers around what President Trump might say or announce next. As things stand, the US Dollar Index (DXY), which reflects the dollar’s worth compared to six major currencies, is hovering just above the 108.00 mark. If more selling pressure mounts, it might fall further.
The DXY experienced a bit of an upset earlier this week as it dropped over 1% when traders realized that tariffs were not included in the series of executive orders President Trump signed as he stepped into office. Initially, there was a misconception in the market that the stance on tariffs had been softened, hinting at a broad delay. However, on Monday night, the narrative shifted drastically. President Trump announced that starting February, a 25% tariff would apply to imports from Canada and Mexico. This news caught everyone off guard and caused immediate depreciation in the Canadian Dollar and Mexican Peso, reversing earlier losses across various markets on Tuesday.
Moving forward, the economic horizon seems relatively quiet; however, the US Treasury is set to release some data on Tuesday. At 16:30 GMT, they will be issuing 3-month, 6-month, and 52-week Treasury bills to the market. As Tuesday unfolds, equity markets are showing some positive momentum. European stocks are treading water, while US futures see an increase of about 0.50%. The CME FedWatch tool hints at a 54.2% likelihood that interest rates will remain untouched in May, with potential hints of a rate cut by June. The Federal Reserve appears to be in a wait-and-see mode, reacting to the unfolding economic indicators under Trump’s administration. Meanwhile, the US 10-year bond yield is around 4.57%, facing an uphill battle to climb back to last week’s highs near 4.75%.
On the technical analysis front for the US Dollar Index, the bulls have regained some control after Monday’s bearish activity, but the path forward is fraught with potential setbacks. If the index aims to climb back to 109.00 and beyond, it must clear some significant resistance levels that might otherwise halt its ascent, leading to a brief recovery before potentially slipping back down to 107.00 or lower.
For sustained momentum, the target is to surpass the 109.29 mark, which has historical significance given it’s a peak from July of last year and part of a rising trendline. Should it succeed, the US Dollar’s next hurdle is 110.79, noted from September highs. If those barriers are broken, the next distant target would be 113.91, a significant double peak from October 2022.
Turning to the potential risks, look out for the 107.85-107.90 region, which helped cushion the index on Monday. Beneath that, the intersection of October 3, 2023’s high and the 55-day Simple Moving Average, around 107.35, should act as a safeguard against rapid declines.
Lastly, let’s touch on inflation, a central theme in market discussions. Generally, inflation involves the rising cost of a basket of goods and services. Economists often pay attention to core inflation figures, which strip out volatile elements like food and fuel, providing a clearer picture. When core inflation exceeds 2%, central banks typically respond with interest rate hikes, often strengthening the national currency. Conversely, when inflation dips below that threshold, rates may be lowered, potentially weakening the currency. Amid high inflation, interest rates climb as central banks aim to curb inflation, drawing global investors seeking favorable returns. Traditionally, gold has been a safe haven during inflationary bouts, yet rising interest rates, which counter inflation, can detract from gold’s allure due to higher opportunity costs.
Understanding these dynamics helps in navigating the current financial landscape effectively.
