US Dollar Index Reacts to Central Bank Liquidity Measures

Key Takeaways

• Currency market responds positively to central bank action
• Euro rises despite rebound in Treasury yields
• Fed rate-setting meeting expected to result in quarter point hike
• Investors shifting to safer banks due to ongoing global banking crisis
• Solvency and liquidity concerns need to be addressed

Overview

The U.S. Dollar is slightly higher against a basket of major currencies early Monday in a subdued trade.

The price action suggests some cautious optimism after global authorities moved to stem contagion from a simmering banking crisis.

At 03:00 GMT, June U.S. Dollar Index futures are trading 103.475, up 0.115 or +0.15%. On Friday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $28.21, down $0.15 or -0.53%.

During the weekend, six central banks including the Federal Reserve, European Central Bank (ECB), Bank of England (BOE), Swiss National Bank (SNB), Bank of Canada (BOC), and Bank of Japan (BOJ) announced measures to boost market liquidity.

This came after Swiss authorities negotiated a buyout of Credit Suisse by UBS, but at a discounted price and with significant debt write-offs.

Currency Market Responds Positively to Central Bank Action

The currency market experienced a “risk positive” initial response following the announcement of joint action by several central banks to enhance market liquidity. This followed Swiss authorities’ negotiation of a buyout of Credit Suisse by UBS, but at a huge discount and with massive debt writedowns. The yen dived and the euro edged higher for a third straight day due to the rebound in Treasury yields.

Banking System in Focus as Fed Meeting Looms

Although the banking system is the currency markets’ immediate focus, a Fed rate-setting meeting on Wednesday looms large, with traders still predicting a quarter point hike. However, money markets are positioned for a peak in rates in May and then a decline until the end of the year. Renewed confidence in the Fed cutting rates this year and ahead of any other central bank is currently driving the market.

Banking Crisis Sparks Investor Fears and Deposit Shifts

Investors remain fearful about the ongoing global banking crisis, with depositors shifting to safer banks and the need to get confidence back into the banking sector. The central banks’ assurances eased immediate fears of contagion, but more needs to be done to address the issues. The key question is whether solvency or liquidity concerns are sufficiently addressed by bailout/merger attempts to stop deposit runs.

Treasury Yields Rise Ahead of Volatile Fed Meeting

Benchmark 10-year Treasury yields and two-year yields rose, and U.S. interest rate futures were bouncing around. Ahead of a Federal Reserve meeting on Wednesday, markets were pricing about a 60% chance of a 25 bp rate hike before steady rate cuts as early as June. Rates pricing is likely to remain volatile while there is concern over regional banks in the United States.

Daily June US Dollar Technical Analysis

The main trend is down according to the daily swing chart. A trade through 103.045 will signal a resumption of the downtrend. A move through 105.490 will change the main trend to up.

The minor trend is also down. A trade through 104.720 will change the minor trend to up. This will shift momentum to the upside.

The nearest resistance is a retracement zone at 103.631 to 104.406. The closest support is a short-term retracement zone at 102.918 to 102.310.

Daily June US Dollar Technical Forecast

Trader reaction to 103.631 is likely to determine the direction of the June US Dollar Index on Monday.

Bearish Scenario

A sustained move under 103.361 will indicate the presence of sellers. This could trigger a break into 102.918 to 102.310.

Bullish Scenario

A sustained move over 103.361 will signal the presence of buyers. This could create the momentum needed to trigger a surge into 104.406.