US Dollar slides as recession fears reemerge

• The US Dollar slid as recession fears emerged overnight. 
• A Big batch of US data will hit markets.  
• The US Dollar Index breaks below 102.00 and is heading lower. 

The US Dollar (USD) drops after recession fears spooked investors overnight, triggered by the hawkish speech from US Federal Reserve (Fed) Chairman Jerome Powell during the semi-annual Banking Panel hearing. Equities sold off and the soured mood continued on Thursday in both Asia and Europe. Investors are fleeing equities, bonds, the Swiss Franc and the US Dollar sell off, while commodities remain unphased. 

The second day of hearings with Fed Chairman Powell is on the agenda at around 14:00 GMT, this time facing the US Senate Banking Panel, though his message is not expected to change much from his speech on Wednesday. Before, a batch of data will come out at 12:30 GMT, including  jobless claims, which  last week sparked substantial US Dollar weakness as the figure came higher than expected. At 14:00 GMT,  Existing Home sales – the final batch of housing numbers for this week –  will come out, together with The Conference Board’s Leading Economic Index.  

Daily digest: US Dollar gets punches

• A slew of US data is due at 12:30 GMT. The Chicago Fed National Activity Index is foreseen to come in at zero for May after a 0.07 increase in April. Jobless Claims data is set to be key as last week’s higher-than-expected increase in Initial Claims triggered substantial US Dollar weakness. Initial Claims for the week ended June 16 are expected at 260,000 against 262,000 la week earlier. Continuing Claims are anticipated to jump  to 1,782K against 1,775K from last week. 
• The last data points on US housing activity are due to come out at 14:00 GMT. Existing Home Sales are seen sliding from 4.28M to 4.25M, with the monthly number expected to decline 0.6%, less than the 3.4% decrease registered in April. . Meanwhile, The Conference Board’s Leading Economic Index for May is also expected at 14:00 GMT. In April, the index declined 0.6% on month.  . 
• Western Texas Intermediate (WTI) Crude Oil to be moving today once  the weekly US oil inventories are published at 15:00 GMT. Crude trades at $71, residing  at a weekly low.. 
• Apart from Fed Chairman Powell, a few other Fed members are set to speak. At 08:00 GMT Fed Governor Christopher Waller delivers opening remarks at the Central Bank of Ireland conference. Fed’s Michelle Bowman delivers opening remarks around 13:55 GMT at a Fed event hosted by the Federal Reserve Bank of Cleveland. Cleveland Fed President Loretta Mester speaks on the economic and policy outlook at the Clevelands annual Policy summit around 14:00 GMT. To close off the speakers, Richmond Fed President Tom Barkin is to speak at the Risk Management Association in Richmond, Virginia. 
• The US Treasury places a 4-week, an 8-week and a 5-year Tips bond auction. 
• Equities are in the red and in sell-off modus.  The China Hang Seng Index is down 2%, the German DAX falls over 1% and US equity futures are all three in the red. The VIX volatility index jumps back to near 14.
• The CME Group FedWatch Tool shows that markets are pricing in a 71.9% chance of a 25 basis points (bps) interest-rate hike on July 26th. The dislocation between market expectations and the Fed communication is getting bigger as Fed Chairman Powell alluded to possible two more hikes, while markets only expect one. 
• The benchmark 10-year US Treasury bond yield trades at 3.75% and remains quite stable as no real flight into bonds is unfolding. 

US Dollar Index technical analysis: breaks below important level

The US Dollar is taking a firm step back against most currencies. Gains against the South Korean Won and the Japanese Yen are softening the blow a bit, while the risk of a further jump high for the EUR/USD pair grows. This results in the US Dollar Index (DXY) breaking below 102.00, printing a new monthly low. 

On the upside, the 55-day Simple Moving Average (SMA) at 102.58 is acting as resistance and could limit any recovery. Should the DXY edge up further, look for the 103.00 psychological level as the next big challenge to the upside. The 100-day SMA at 103.06 will be key to reach should the DXY want to advance even more..  

On the downside, the psychological level near 102.00 has been breached and is no longer in play. Once price action starts to further move away from it, expect to see risk growing for nosedive move toward 100.82. That means a challenge for the low of this year and would imply a substantial devaluation for the Greenback to come. 

How does Fed’s policy impact US Dollar?

The US Federal Reserve (Fed) has two mandates: maximum employment and price stability. The Fed uses interest rates as the primary tool to reach its goals but has to find the right balance. If the Fed is concerned about inflation, it tightens its policy by raising the interest rate to increase the cost of borrowing and encourage saving. In that scenario, the US Dollar (USD) is likely to gain value due to decreasing money supply. On the other hand, the Fed could decide to loosen its policy via rate cuts if it’s concerned about a rising unemployment rate due to a slowdown in economic activity. Lower interest rates are likely to lead to a growth in investment and allow companies to hire more people. In that case, the USD is expected to lose value.

The Fed also uses quantitative tightening (QT) or quantitative easing (QE) to adjust the size of its balance sheet and steer the economy in the desired direction. QE refers to the Fed buying assets, such as government bonds, in the open market to spur growth and QT is exactly the opposite. QE is widely seen as a USD-negative central bank policy action and vice versa.