- The US dollar is depreciating rapidly, and US stock markets are also entering the correction zone.
- Markets are terrified of the prospect of a recession following the release of some worrying data from the US last week.
- The U.S. dollar index fell below 103.00 on Monday after a delicate Asian session.
The US dollar (USD) is accelerating its decline on Monday, approaching the US session, after the European session was able to keep the Greenback stable for several hours. The main trigger is the macabre performance of the Japanese Nikkei and Topix indices, which closed more than 12% lower than the blood-red numbers. For the Nikkei, this is the worst performance since 1987, forcing investors and traders to invest in unthreatening bonds. With the fall in yields, the US dollar is losing strength, as a series of delicate US economic data and lower yields no longer make the Greenback shine.
On the economic front, the week starts with a substantial batch of data from the Institute of Supply Management (ISM). Traders will be shaking in their boots when the numbers come out, as another batch of disappointing data could further support the recession narrative. Fortunately, this week does not feature any further first-order data, so the dust can settle later in the week.
Daily Market Impact Review: Data Will Be Ignored
- Panic gripped markets on Monday after Japanese stocks closed down more than 12%. Bloomberg reported that at one point traders were pricing in a 60% chance of an emergency rate cut in August.
- At 13:45 GMT, the final readings of the S&P Global Purchasing Managers Index (PMI) for July will be released:
- The services PMI is expected to be 56.
- The total is expected to remain stable at 55.
- At 14:00 GMT the Institute for Supply Management (ISM) will release its July results:
- The employment rate in the services sector is expected to rise from 46.1 to 46.5.
- The services sector recent orders index was previously 47.3, with no forecast.
- The services sector PMI should emerge from recession and fall from 48.8 to 51.
- The Paid Services Index should decline slightly from 56.3 to 55.8.
- Stock markets are falling out of bed on Monday, with Japan’s Nikkei facing its worst performance since 1987. U.S. stocks are falling, with the Nasdaq leading with a 4% drop. European shares are facing smaller losses, down an average of 2.5%.
- The CME Fedwatch tool shows a 96.5% chance of a 50 basis point (bps) rate cut by the Federal Reserve in September. Another 50 bps cut is expected in November by 78.6%, while a 20.6% chance of just a 25 bps cut is priced in that month.
- The U.S. 10-year Treasury benchmark rate hit a recent 52-week low of 3.69%.
US Dollar Index Technical Analysis: No, It’s Not a Selloff
The US Dollar Index (DXY) has cracked under pressure following last week’s disappointing US economic data releases. The sell-off in equities continues on Monday, dragging the dollar lower. There are no clear support levels nearby, although the Relative Strength Index (RSI) indicates an end to the sell-off, and losses in Europe and the US are circumscribed for now in stock markets.
The bounce will have three levels, the first level is 103.18 which held on Friday but broke during the Asian hours on Monday. Once DXY closes above this level, the next level is 104.00 which was support in June. If DXY manages to get back above this level, the 200-day elementary moving average (SMA) at 104.22 will be the next resistance level to watch.
On the other hand, the oversold RSI should already prevent DXY from incurring any major losses. Support nearby is the March 8 low at 102.35. Beyond this level, pressure will start building at 102.00 as a substantial psychological value, before testing 101.90, which was a key level in December 2023 and January 2024.
US Dollar Index: Daily Chart
