US Dollar looking for direction with ISM kicking off busy agenda for this week
- The US Dollar trades mixed against its major peers on Monday.
- Markets are in a positive tone after a quiet weekend on the geopolitical front.
- The US Dollar Index trades in the mid-104.00 region, looking for direction.
The US Dollar (USD) trades broadly stable on Monday after a calm weekend without geopolitical headlines setting the tone. The Greenback will not be able to enjoy the calm start for long, because this week is full on the economic front. On Monday, a few important data points are set to be released in the run-up to the ultimate data point right at the end of the week: the US Employment Report, with its Nonfarm Payrolls print for May.
On Monday, all eyes will be on two PMI surveys gauging the health of the US manufacturing sector: the final reading of the S&P Global Manufacturing Purchasing Managers Index (PMI) for May and the more market-moving survey from the Institute for Supply Management (ISM).
Daily digest market movers: ISM on the wires
- Monday’s US calendar kicks off with the release of the final S&P Global Manufacturing PMI for May at 13:45 GMT. The preliminary estimate was at 50.9 and it is expected to remain unchanged.
- At 14:00 GMT, the Institute for Supply Management releases its recent findings from its monthly survey for May:
- The headline Manufacturing PMI index is expected to increase to 49.8 from 49.2.
- The Employment Index was at 48.6 in April, with no forecast available for May.
- The New Orders index came in at 49.1 a month ago, with no consensus view reported.
- The Prices Paid index should remain rather stable, from 60.9 to 60.
- Construction Spending is expected to rise 0.2% in April, swinging from a 0.2% contraction in March.
- Equities are trading in the green across the board, with all major indices from Asia, Europe and US futures up by an average of 1%.
- According to the CME Fedwatch Tool, Fed Fund futures pricing data suggests a 46.1% chance for keeping rates unchanged in September, against a 47.2% chance for a 25 basis points (bps) rate cut and a 6.7% chance for an even 50 bps rate cut. An interest rate hike is no longer considered an option.
- The benchmark 10-year US Treasury Note trades around 4.47%, in the middle of its monthly range between 4.34% and 4.61%.
US Dollar Index Technical Analysis: Due for a breakout any day
The US Dollar Index (DXY) is hanging a bit in no man’s land this Monday after its negative performance last week. When looking at a weekly chart, the DXY is clearly in consolidation, posting with lower highs and higher lows as sellers and buyers are being pushed towards each other. In this context, normally a breakout is then set to take place, something that could happen this week taking into account the very busy economic calendar ahead.
On the upside, the DXY index reclaimed the key 105.00 round level, which broadly aligns with the 55-day Simple Moving Average (SMA). It will be important to see if these levels hold support should the US data weaken. Once that is proven, look for 105.52 and 105.88.
On the downside, the 200-day SMA at 104.44 and the 100-day SMA around 104.42 are the last line of defence. Once that level snaps, an air pocket is placed between 104.30 and 103.00. Should the US Dollar decline persist, the low of March at 102.35 and the low from December at 100.62 are levels to consider.
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 stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” 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 seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.