- The US Dollar Index (DXY) sprinted to a fresh two-year high in a volatile session after Eurozone PMI data suggested the region’s economy is contracting.
- The US Dollar gets additional support by safe-haven flows amid escalating geopolitical risks in the Russia-Ukraine war.
- The US Dollar Index popped above 108.00 and is fading in the aftermath.
The US Dollar (USD) jumps on Friday to its highest level in two years, with the DXY US Dollar Index popping above 108.00, as Purchasing Managers Index (PMI) data for the Eurozone signaled that the region’s economy fell back into contraction in November. The data weighed heavily on the Euro (EUR) – the main foreign currency forming the DXY – as it could mean more interest rate cuts ahead by the European Central Bank (ECB) in order to support growth.
Earlier on Friday, the final reading for the German Gross Domestic Product (GDP) was downwardly revised to 0.1%, which means that the Eurozone’s largest economy barely grew in the third quarter.
Adding to the Euro weakness, the US Dollar keeps getting support from safe-haven flows due to the escalating war between Russia and Ukraine. According to Yahoo News, Russia has put a US military base in Poland at the top of its priority list of targets for the next retaliations.
The US economic calendar features the preliminary S&P Global PMI readings for November as well. After the big miss from the European PMI numbers, robust figures for the US could fuel further US Dollar strength. Apart from that, the final reading for the University of Michigan Consumer Sentiment survey will also be released.
Daily digest market movers: Kick in the nuts
- European PMI data presented a bleak picture for the Eurozone and its main economies. The Eurozone Composite PMI fell to 48.1 from 50, missing expectations and signaling that the region’s economy is contracting. The data suggested that the services sector fell into contraction, while the downturn in the manufacturing sector gained traction.
- Individual PMI data for both France and Germany also broadly missed expectations. For Germany, the data suggests that economic activity contracted at the quickest rate in nine months, while in France the contraction was the steepest since January.
- Germany’s Gross Domestic Product (GDP) reading for the third quarter came in at 0.1%, downwardly revised from 0.2% in the preliminary reading.
- At 14:45 GMT, S&P Global will release the preliminary Purchasing Managers Index (PMI) reading for the US:
- The Manufacturing component is expected to edge up to 48.8 from 48.5 previously, remaining in contraction.
- The Services PMI is expected to increase to 55.3 from 55.0 previously.
- The University of Michigan survey will publish its final November reading at 15:00:
- Consumer Sentiment is expected to come in a bit better at 73.7 against the preliminary reading of 73.0.
- The Inflation expectations are expected to remain at 3.1%.
- Equities are not digesting well the European PMI numbers and are down on the day with both European and US equities down by less than 0.50%.
- The CME FedWatch Tool is pricing in another 25 basis points (bps) rate cut by the Fed at the December 18 meeting by 55.9%. A 44.1% chance is for rates to remain unchanged. While the interest-rate cut scenario is still the most probable, traders have pared back some of the rate-cut bets compared with a week ago, when a rate-cut possibility was at 62%.
- The US 10-year benchmark rate trades at 4.40%, sliding further away from the high printed on Friday at 4.50%.
US Dollar Index Technical Analysis: US PMI just got interesting
The US Dollar Index (DXY) is edging up, sparked by those European PMI numbers that reveal the whole Eurozone is in contraction. Pending US PMI data to be released later today, it looks like the performance gap between Europe and the US just got bigger in favor of the United States. Look out for some profit-taking ahead of the weekend, which might trigger a fade by the US closing bell on Friday evening.
With the fresh breakout, a daily close above 107.00 will be key now before heading into the weekend. A fresh two-year high is now seen at 108.07, which is the statistical level to beat next. Further up, the 109.00 big figure level is the next one in line to look at.
The first level on the downside is 105.89, the pivotal level since May 2. A touch lower, the pivotal 105.53 (April 11 high) should avoid any downturns towards 104.00. Should the DXY fall all the way towards 104.00, the big figure and the 200-day Simple Moving Average at 103.95 should catch any falling knife formation.
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.
Source: https://www.fxstreet.com/news/us-dollar-surges-to-two-year-high-as-eurozone-pmis-disappoint-202411221001