US Dollar steadies as European bond market jitters persist

• The US Dollar trades in the green against most peers, with single exceptions for Central European currencies. 
• France’s political uncertainty continues to weigh on the country’s bonds and stocks.  
• The US Dollar index trades above 105.50 ahead of a soft Monday opening. 

The US Dollar (USD) trades broadly steady on Monday as risk aversion prevails in markets amid the French political uncertainty. President Emmanuel Macron’s decision to call for snap legislative elections and the possibility of a far-right-dominated parliament spooked investors, who sold French assets on concerns about how Macron would cope with such a scenario. Sovereign bond spreads in Europe are widening even more, signalling a bond market in distress. Should the bond market continue its rout, the possibility of an intervention by the  European Central Bank (ECB) shouldn’t be ruled out in order to keep the European bond market cohesive and in sync with its monetary policy. 

On the economic data front, a very quiet start for this week from the US perspective with some lighter data ahead. Pivotal elements to look forward to are the Retail Sales on Tuesday and the Purchasing Managers Index (PMI) numbers on Friday. Traders will need to assess what will get priority: softer US data which would see an easing US Dollar, or will it be again the European political turmoil which would rather see US Dollar strength. 

Daily digest market movers: European bond markets get trashed

• At the start of the European trading session on Monday, European sovereign bond spreads are widening even further than Friday (80 basis points at the time of writing between French and German 10-year benchmark bond yields). A dispersion in sovereign bond yields per country is causing issues for the European Central Bank (ECB) as it has only one overall monetary policy rate that it can use to control inflation in the Eurozone. When bond spreads between countries are getting too wide and too dispersed, the ECB has more difficulties controlling local price forces, which might lead to local flare-ups in inflation or even sudden deflation. The second element is that those countries might start having issues to fund their sovereign debt on international markets and might trigger a bank run or having the ECB stepping in to offer a lifeline to that country so that it doesn’t default on its debt. The best example of that was Greece in 2010 during the sovereign debt crisis. 
• At 12:30 GMT, the NY Empire State Manufacturing Index for June is set to be released. Economists are expecting it to come in at -13, slightly up from  -15.6 a month earlier.
• Near 17:00 GMT, Federal Reserve Bank of Philadelphia President Patrick Harker participates at the Global Interdependence Centre's 42nd Annual Monetary and Trade Conference.
• Equity markets are looking for direction. European equities are trying to snap the losing streak, even with the bond market turmoil. US Futures are mildly in the green. 
• The CME FedWatch Tool shows a 33.3% chance of the Fed interest rate remaining at the current level in September. Odds for a 25-basis-points rate cut stand at 59.0%, while a very slim 7.7% chance is priced in for a 50-basis-points rate cut.
• The benchmark 10-year US Treasury Note slides to the lowest level for this month, near 4.23%, flirting with the lows seen in March. 

US Dollar Index Technical Analysis: Eyes on Europe

The US Dollar Index (DXY) would likely not be where it is this Monday if it were not for the current European political turmoil. With a higher DXY, there is the risk of a quick correction if European headline risk start to abate and US data comes on the soft side. A fair warning thus that this US Dollar strength might be short-lived.  

On the upside, no big changes to the levels traders need to watch out for. The first is 105.52, where the DXY is trading around, a barrier that held during most of April. The next level to watch is 105.88, which triggered a rejection at the start of May and will likely play its role as resistance again. Further up, the biggest challenge remains at 106.51, the year-to-date high from April 16. 

On the downside, the trifecta of Simple Moving Averages (SMA) is still playing support. First is the 55-day SMA at 105.10. A touch lower, near 104.55 and 104.47, both the 100-day and the 200-day SMA are forming a double layer of protection to support any declines. Should this area be broken, look for 104.00 to salvage the situation.