- The US Dollar has kicked off this week on the front foot after Donald Trump slapped BRICS with tariff.
- Focus shifts to Paris where this Monday, during European trading hours, French parliament is set to convene ahead of a vote for no-cofidence.
- The US Dollar Index spikes back above 106.00, though it faces a key level ahead at 106.52.
The US Dollar (USD) is rallying higher on Monday driven by two main drivers. First element is Donald Trump’s promise to impose tariffs on BRICS countries if they stop using the USD. The second amin driver is the increasing French political turmoil, which is weighing on the Euro (EUR).
In a post on Saturday, the US President-elect said he would impose a 100% tariff on the BRICS if the group decides to move away from trading using the USD. “We require a commitment from these Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100% Tariffs, and should expect to say goodbye to selling into the wonderful U.S. Economy,” he said.
Investors are also punishing the EUR – the main currency within the DXY US Dollar Index basket – on the back of failed budget talks in France and increasing chances that a no-confidence vote against the current prime minister is approved. Finance Minister Antoine Armand said on Bloomberg television over the weekend that France will not be blackmailed on far-right demands from the National Rally (NR) of Marine Le Pen, which is asking for changes in the budget bill. The NR President Jordan Bardella said on Monday that its party will trigger a no-confidence vote mechanism “unless there is a last-minute miracle,” Reuters reports.
A no-confidence vote could take place as early as Wednesday, and if successful it could bring the French government down.
Meanwhile, the US economic calendar is set to kick off with an eventful Monday ahead, with the Institute for Supply Management (ISM) releasing its Manufacturing PMI numbers for November.
Daily digest market movers: Keep an eye on the Fed speakers
- In a televised interview over the weekend, French Finance Minister Antoine Armand said on Bloomberg television that the French government will not be held hostage by the far-right party of Marine Le Pen. By pushing back on the additional demands from the National Rally party, the French government could fall as a no-confidence vote will get enough votes if Marine Le Pen’s party backs the vote with its majority.
- At 14:45 GMT, S&P Global will release the final reading for November of its Manufacturing Purchase Managers Index (PMI) survey. The expectation is for a steady 48.8, unchanged from the preliminary reading.
- Near 15:00 GMT, the Institute for Supply Management (ISM) will release its November PMI data for the Manufacturing Sector.
- The headline PMI is set to tick up to 47.5, from 46.5, but still stuck in contraction territory.
- The Prices Paid index, a leading indicator of inflation, is expected to tick up to 55.2 from 54.8.
- Near 20:15 GMT, Federal Reserve Governor Christopher Waller delivers a speech about the US economic outlook at the American Institute for Economic Research Monetary Conference in Washington DC.
- At 21:30 GMT, Federal Reserve Bank of New York President John Williams delivers keynote remarks and participates in a Q&A session at an event organized by the Queens Chamber of Commerce in New York.
- Equities in Europe and the US Futures are not really happy with the turn of events in France. Losses are contained though, by less than 0.50% on average.
- The CME FedWatch Tool is pricing in another 25 basis points (bps) rate cut by the Fed at the December 18 meeting by 67.1%. A 32.9% chance is for rates to remain unchanged. The Fed Minutes helped the rate cut odds for December to move higher.
- The US 10-year benchmark rate trades at 4.21%, rather steady for the start of the week and above the 4.16% seen last week on Friday.
US Dollar Index Technical Analysis: A week full of pivotal moments
The US Dollar Index (DXY) is seeing a flight from across the Atlantic Ocean, with investors pulling out some investments out of Europe and into the US. A potential fall of the French government could quickly spill over into Germany, where Prime Minister Olaf Scholz position is hanging by a threadahead of the 2025 elections. All this political uncertainty could block investment opportunities, with investors favoring the equity-supportive Trump administration that is set to take over in January.
On the upside, 106.52 (April 16 high) is the first level to watch and looks ready to be tested already this Monday. Should the Dollar bulls reclaim that level, 107.00 (round level) and 107.35 (October 3, 2023, high) are back on target for a retest.
However, warnings for a knee-jerk reaction need to be issued. In case of a downturn, the pivotal level at 105.53 (April 11 high) comes into play before heading into the 104-region. Should the DXY fall all the way towards 104.00, the big figure and the 200-day Simple Moving Average at 104.03 should catch any falling knife formation.
US Dollar Index: Daily Chart
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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