Dollar Flat: Geopolitical Wild Ride, DOGE, G7 Meeting, Trump Speech
- After a wild ride earlier, the US Dollar is now steady as a flurry of geopolitical news hits the markets this Monday.
- In Germany, the far-right AfD party is trailing behind the CDU in early election results.
- The US Dollar Index (DXY) has bounced back from a nearly 0.50% drop and is currently trading slightly higher.
The US Dollar Index (DXY), which gives you a snapshot of the US Dollar’s (USD) strength against six major currencies, has completely erased losses seen in Asian trading during this Monday’s US session. What initially pushed the US Dollar down? Well, it was the initial excitement surrounding the Euro (EUR) after early German election results pointed to a solid lead for the Christian Democratic Union of Germany (CDU), the party expected to spearhead coalition talks. But as things calmed down, the reality set in: this likely means no major shifts in German leadership or its political direction. This realization caused the Euro to give back some of its gains, allowing the DXY to stabilize and even nudge into positive territory.
On the US front, some interesting headlines are emerging. Word is that several departments within the Pentagon have advised employees to disregard a request from Elon Musk and his initiative, playfully dubbed DOGE (Department of Government Efficiency), to disclose their job duties. Meanwhile, Elon Musk himself took to Twitter, reportedly warning that employees who don’t comply with office return mandates or reporting to DOGE could face leave.
Elsewhere on the global stage, the ongoing G7 meeting is facing headwinds, with the group struggling to reach a consensus on a joint statement to mark three years since Russia’s invasion of Ukraine. The sticking point? Disagreements between the US and its European allies. The US is reportedly pushing back against wording that condemns Moscow and calls for tougher energy sanctions, even hinting at withdrawing support for the entire statement. However, discussions are still underway to find a way forward.
Turning to the US economic calendar, the week kicks off on the quieter side, with everyone eagerly anticipating the release of the US Gross Domestic Product (GDP) for the fourth quarter of 2024 on Thursday and the Personal Consumption Expenditures (PCE) data for January on Friday. That said, we do have the Chicago Fed National Activity Index for January coming out today, Monday. Later today, United States (US) President Donald Trump is also scheduled to deliver a speech, so keep an eye out for that.
Daily digest market movers: Meh, Markets Yawn
- The Euro (EUR) has surrendered all of its gains against the US Dollar (USD). Traders seem unimpressed by the prospect of the same-old, same-old in German politics and the potential lack of significant reforms from the new government taking shape.
- The Chicago Fed National Activity Index for January came in at -0.03, a slight dip from the previous reading of 0.15.
- The US Treasury will be holding auctions for 3-month and 6-month Bills, along with a 2-year Note auction, all happening this Monday.
- US President Donald Trump and French President Macron are expected to hold a joint press conference around 7:00 PM GMT, so tune in.
- Stocks are breathing a sigh of relief after the German election outcome, although the German Dax is losing steam after its earlier gains as US trading begins. The broader pan-European Stoxx 50 index is even slipping into negative territory after the US markets opened.
- The CME FedWatch tool is currently showing a 41.2% probability that interest rates will remain steady in June, versus a slightly higher 46.2% chance of a 25 basis point (bps) rate cut. The needle is still moving!
- The US 10-year Treasury yield is hovering around 4.43%, which is down over 3% from last week’s peak of 4.574%.
US Dollar Index Technical Analysis: Something’s Gotta Give!
The US Dollar Index (DXY) is really playing out a classic market scenario here, and the German election results acted as the catalyst. During the Asian trading session, there was a sense of relief, and the Euro got a boost against the Greenback. The thinking was that a crisis had been avoided with the Far-Right not gaining enough ground to lead Germany. However, now that the initial buzz has faded, markets are starting to realize that the likely coalition in Germany points to, well, more of the same – the kind of politics we’ve seen for decades. This isn’t seen as enough to really give the Euro a substantial additional lift.
Looking at the upside, the 100-day Simple Moving Average (SMA) around 106.61 could act as a ceiling for bulls trying to push the Dollar higher. If they manage to break through, the next target could be 107.35, a key support level from December 2024 and January 2025. And who knows, if US President Trump drops any surprise bombshells today, we might even see a test of 107.96 (the 55-day SMA).
On the flip side, the 106.52 level (April 16, 2024, high) has seen a false breakout – for now at least. However, that little fake-out likely triggered some stop-loss orders, potentially shaking out some bulls from their long US Dollar positions. Another dip lower might be needed to lure those Dollar bulls back in at more attractive levels, maybe around 105.89 or even down to 105.33.
Fed FAQs
Ever wondered how monetary policy works in the US? It’s all steered by the Federal Reserve (Fed). The Fed’s got a two-part mission: keep prices stable and get everyone working. Their main tool to make this happen? Adjusting interest rates. If prices are climbing too fast and inflation is above the Fed’s 2% target, they’ll bump up interest rates. This makes borrowing more expensive across the board. The side effect? A stronger US Dollar (USD), because it makes the US look like a better place for international investors to park their cash. On the flip side, if inflation dips below 2% or unemployment is too high, the Fed might cut interest rates to encourage borrowing, which can put pressure on the Greenback.
So, how often does the Federal Reserve (Fed) get together to talk policy? Eight times a year, the Federal Open Market Committee (FOMC) meets to assess how the economy is doing and decide on monetary policy. The FOMC meetings are a bit of a gathering of minds, attended by twelve Fed bigwigs: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four presidents from the other eleven regional Reserve Banks (they rotate these spots annually).
When things get really serious, the Federal Reserve has another trick up its sleeve: Quantitative Easing (QE). Think of QE as the Fed hitting the gas pedal on credit flow when the financial system is jammed up. It’s a non-standard move for tough times or when inflation is super low. It was the Fed’s go-to weapon during the Great Financial Crisis back in 2008. Essentially, the Fed prints more Dollars and uses them to buy up top-notch bonds from financial institutions. The usual result of QE? It tends to weaken the US Dollar.
And what about Quantitative tightening (QT)? That’s basically QE in reverse. The Federal Reserve stops buying bonds from financial institutions and doesn’t reinvest the money from bonds that mature. This tightens things up, and is generally seen as a positive factor for the value of the US Dollar.
