US Dollar turns 180 degrees on Tuesday and pairs back Monday losses


The US Dollar turns around 180 degrees on Tuesday, paring back losses from Monday.
The US Treasury is set to auction its always important 10-year note.
The US Dollar Index jumps back above 104.50 and looks set to stretch back to 105.

The US Dollar (USD) is nearly fully recovered from Monday’s losses. The biggest supporter for the stronger Greenback in European trading hours is the Polish Zloty (USD/PLN), which was up nearly 1.40% at one given point. The surprise rate cut from the Polish Central Bank last week is weakening the Central European currency for a fourth straight day against the Greenback.  

Although the calendar is still holding any important data points, expect traders to start prepositioning for the US Consumer Price Index report (CPI) due Wednesday. The Bid/Cover ratio in the US 10-year note, meanwhile, will give investors good insight into whether participants believe the US can still bear these higher rates and refund its maturing debt in the meantime. Expect to see yields creep higher again in the US as ample supply is being issued yet again in the markets. 

Daily digest: US Dollar sees Small Businesses still healthy

Traders will have seen a blip on several charts in Euro and US Dollar against other currencies around 01:00 GMT. Several banks are confirming that a fat-finger event occurred where a $600 million forex order was given, instead of the foreseen $60 million. The peak or dip was quickly pared back once the mistake was discovered, though it triggered anomalies across the board in several major pairs. 
This week finally kicked-off with some US macro data: the Business Optimism Index from the National Federation of Independent Business (NFIB) came in steady at 91.3, from 91.9 previous month.Althoug this might be a small step back, the number as such is still a very elevated one. 
At 17:00 GMT, the much anticipated US 10-year note will be auctioned. The previous rate was at 3.99% and is expected now to be above 4%. Traders will look at the bid-cover ratio as well to see how big the appetite was for this auction as yields will be fixed higher. 
Equities are taking a small step back after the Japanese Topic Index closed up 0.80% for this Tuesday. 
The CME Group FedWatch Tool shows that markets are pricing in a 93% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September. 
The benchmark 10-year US Treasury bond yield trades at 4.29% and remains elevated even after the step back on Monday. 

US Dollar Index technical analysis: Back in green

The Greenback has nearly paired back all of its incurred losses from Monday. The winning streak from last week got briefly interrupted and could be seen continuing as of this Tuesday. Should the US Dollarindex (DXY) break above the high of Monday, expect to see another upbeat week for the US Dollar Index 

The new high to watch is at 105.16, both the high from last Thursday and the six-month high. The US Dollar Index first needs to gain back its lost territory from this Monday and break above the peak of Thursday mentioned here before. From there, the next high is at 105.88, the high of 2023.

On Monday, 104.44 kept it together and refrained from allowing the DXY from selling off any further. The high of August 25 did its job and acted as a pivotal level. Should the uptick from this Tuesday reverse and 104.44 gives way, a substantial downturn could take place to 103.04, where the 200-day SMA comes into play for support. 


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.

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