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US Dollar unable to turn situation around ahead of last round in French elections this weekend

  • The US Dollar retreats for a fourth straight day this week. 
  • Nonfarm Payrolls print stronger, though unemployment rate disappoints. 
  • The US Dollar index drifts back below 105.00 ahead of French elections this weekend. 

The US Dollar (USD) is stuck with its losses for this Friday and for the whole of the week. A four-day losing streak is simply too big for the Dollar bulls to salvage, even despite upbeat Nonfarm Payrolls numbers. This positions the Greenback in a rather weak corner just ahead of the second and last round of French elections this weekend, which could lead to another leg lower if French President Emmanuel Macron is able to avoid a majority win for the Far Right party of Marie Le Pen on Sunday.

On the US economic front, the Nonfarm Payrolls print got overshadowed by a downward revision from the previous number, from 272,000 to 218,000. The Unemployment Rate ticked up as well from 4.0% to 4.1%. Should that unemployment rate start to tick up consecutively over the summer, than the Fed has enough reason to start cutting in September for the first time. 

Daily digest market movers: NFP overshadowed

  • The Labour Party won a landslide victory in the UK, and Keir Starmer is on track to become the next resident at 10 Downing Street. This result is increasingly strange, given the moves to the right in Europe. 
  • Ahead of Sunday’s election in France, the far-right National Rally party of Marine Le Pen is no longer in the position to gain a majority, according to recent polls. 
  • At 12:30 GMT, the US Employment Report for June was released:
    • Nonfarm Payrolls went from a downward revised 218,000 to 206,000.
    • Average Hourly Earnings decreased to 0.3% in June compared with 0.4% in May.
    • Unemployment Rate ticked up surprisingly from 4.0% to 4.1%.
    • No severe volatile market reaction, though the US Dollar Index retreats below 105.00.
  • At 15:00 GMT, the Fed’s Monetary Policy Report will be released. This report is submitted semiannually to the Senate Committee on Banking, Housing, and Urban Affairs and to the House Committee on Financial Services.
  • Asian stocks were unable to close the week on a high note and saw both China and Japan close negative. European equities are doing well on the back of the UK outcome and are jumping higher. The UK FTSE 100 was even up 1% at one given point before falling back to flat ahead of the US session. 
  • The CME Fedwatch Tool is broadly backing a rate cut in September despite recent comments from Fed officials. The odds now stand at 66.5% for a 25-basis-point cut. A rate pause stands at a 27.4% chance, while a 50-basis-point rate cut has a slim 6.1% possibility. 
  • The US 10-year benchmark rate trades at 4.31%, and has printed a fresh weekly low.

US Dollar Index Technical Analysis: Put in a corner

The US Dollar Index (DXY) has been unable to head back above the key level of 105.20 which is the 55-day Simple Moving Average (SMA). This means that the rejection from early Friday in the Asian session will see some follow through over the weekend and at the opening on Monday. Should the French election outcome be in favor of current President Emmanuel Macron, expect to see some more US Dollar weakness with the DXY declining to 104.77 and possible even lower. 

On the upside, the 55-day Simple Moving Average (SMA) at 105.20 has now turned into resistance after an early test during the Asian session received a firm rejection and pushed the DXY further down again to test that 105.00 level. Should that 55-day SMA be reclaimed again, 105.53 and 105.89 are the next nearby pivotal levels. In case the Nonfarm Payrolls report was utterly strong,  the red descending trend line in the chart around 106.23 and April’s peak at 106.52 could come into play. 

On the downside, the risk of a nosedive move is increasing, with double support at 104.77, the confluence of the 100-day SMA and that green ascending trend line from December 2023. Should that double layer give way, the 200-day SMA at 104.44 is the gatekeeper that should catch the DXY and avoid any further declines, which could head to 104.00 as an initial stage in the correction. 

US Dollar Index: Daily Chart

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.