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US Dollar back at Friday’s session lows as Greenback can not catch a break


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  • US Dollar heads lower again as earlier small recovery-gains are being erased with session’s lows for the Greenback.
  • Traders will look for comments from Fed speakers on Friday that might try to salvage the losses.
  • US Dollar Index sinks to a new monthly low and flirts with a break below 102.

The US Dollar (USD) is on track for its worst monthly performance against the Euro and a few other peers after the European Central Bank (ECB) and its chairman Christine Lagarde out-hawkished 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 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, Chris Waller at 11:45 and Tom Barkin at 13:00 GMT. Look for clues or any change in statements in order 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 tilted to the downside

  • Comments from Fed’s Chris Waller that the Fed will use its policy tools to stem financial systems risk build-up, and that the Fed is not going to change its policy due to worry over a few banks. 
  • China says its studying policies to expand demand and preventing risk, trying to roll out economic policy controls. 
  • The US futures markets Chicago Mercantile Exchange (CME),Intercontinental Exchange (ICE),  and the Chicago Board Options Exchange (CBOE) and several other institutions are facing exceptional 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 see 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 of 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 materialise. 
  • 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 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 Japanese Yen, which was a topic of concern for the central bank and requires additional attention. 
  • Three Fed members 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 towards this week’s monetary policy or personal views as 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, 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 Japans 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 entering in the green.
  • 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 3.73%, 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: Back in red

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. After a mild recovery in the European session, sentiment is turning South again for the US Dollar Index (DXY) with the US trading session just around the corner. 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 ball park 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. 

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.