US Dollar favored due to global risk concerns

• The US Dollar paints a risk-off picture at the start of the week. 
• China's economic numbers paint a bleak picture of its post-covid recovery.  
• US Dollar Index to print fresh monthly high again.

The US Dollar (USD) continues where it left off Friday evening at the US closing bell. The Greenback-favored sentiment this Monday is built on the once again disappointing numbers out of China. With Country Garden, an even bigger real estate developer than Evergrande, on the brink of collapse, Chinese loan data pointed to an 89% drop in distributed loans to companies and households. The Chinese credit crunch will further deteriorate its economic numbers and growth, threatening world economic growth in a spillover effect. 

There are no important data points for Monday and the rest of the week. On Tuesday, US retail sales numbers will flavor the market, and on Wednesday the latest US Federal Reserve Minutes will be key data for further guidance and clues on where the US Dollar Index (DXY) might move later this week. Without pivotal data points, expect markets to be on autopilot with no real seismic shifts in current trends.

Daily digest: US Dollar picking up

• Main headlines this Monday are on the Chinese property builder Country Garden., which is on the brink of a default and might need financial aid from the Chinese government.
• Chinese loan distribution to companies and households dropped 89% for the month of July against June’s numbers. Loans are a vital item in an economy for companies that want to expand and for household consumption. 
• Forex markets are also gearing up for a shock intervention by the Japanese finance ministry as USD/JPY has hit 145 in early Monday trading. An intervention could see heavy US Dollar selling to get the USD/JPY exchange rate back down to 140 or 135 in a short period. In Japan, it is not the central bank but the finance ministry overseeing the exchange rate positioning. 
• The US Treasury will tap the market for a 3-month and 6-month bill auction. 
• Asian stocks are being slaughtered on Monday, with the Japanese TOPIX index down 1% at its closing bell. Hong Kong’s Hang Seng is down over 2%, in turn dragging European equities lower. US equity futures are in the red, though marginally by roughly 0.15%. A late recovery is still more than possible later this Monday. 
• The CME Group FedWatch Tool shows that markets are pricing in an 88.5% chance that the Federal Reserve will pause interest rate hikes at its meeting in September. The probability declined from above 90% last week as sticky inflation could mean the Fed might need to keep rates elevated for longer.  
• The benchmark 10-year US Treasury bond yield trades at 4.16% after the summary from last week’s US inflation data was that inflation is slowing down, though it remains sticky. This confirms that the US Federal Reserve (Fed) is right to hold rates steady for longer, while markets got it wrong with their presumed cuts in early 2024.

US Dollar Index technical analysis: low-hanging fruit

The US Dollar continues its rally from last week and opens the week with gains against most major peers. The US Dollar Index (DXY) is increasing, printing another new monthly high. Special attention from a technical point of view for EUR/USD where the US Dollar is about to break both the 55-day and the 100-day Simple Moving Average and could see US Dollar strength helping the DXY to break a substantial cap on the upside. 

For the upside, 103 as a big figure will be challenged today. A touch further up, the 200-day SMA at 103.37 will be a difficult cap to cross above. As no real big events are scheduled for this week, and already the DXY has printed a new monthly high this Monday morning, it is questionable if this sentiment-driven move will push the DXY above the important 200-day SMA.    

On the downside, several levels will be tested regarding support. The first candidate is the high of Friday at 102.90. If that fails, look for 102.38 with the 55-day SMA and the 100-day SMA nearby as double belts for underpinning the price action in the US Dollar Index. Should some event or headline trigger a break-even below those two moving averages, expect to see 102 challenged to catch the falling price action.

What is US Dollar Index (DXY)?

The US Dollar Index, also known as DXY or USDX, is a benchmark index that was established by the US Federal Reserve in 1973. DXY is widely used as a tool measuring the US Dollar (USD) value in global markets. The index is calculated by measuring the US Dollar’s performance against a basket of six foreign currencies, the Euro, the Japanese Yen (JPY), Swedish Krona (SEK), the British Pound (GBP), the Swiss Franc (CHF) and the Canadian Dollar (CAD).

With 57.6%, the Euro has the biggest weight in the index followed by the JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), and CHF (3.6%). Hence, a sharp decline in the EUR/USD pair could help the US Dollar Index rise even if the US Dollar weakens against some of the other currencies in the basket.