US Dollar eases after earlier safe-haven inflow from Middle East turmoil

• The US Dollar eases a touch despite safe-haven support on early Friday trading. 
• Tensions in the Middle East flared up again with reports of Israel attacking an Iranian military base. 
• The US Dollar Index holds above 106.00, though pressure is mounting for a break below it. 

The US Dollar Index (DXY), which tracks the US Dollar against a basket of six major currencies, eases and gives up earlier gains driven by the reports of the attack from Israel on Iran, confirmed by US officials. While markets are awaiting any comments or headlines out of Iran, some easing is taking place in safe-haven assets after earlier big inflows in the Greenback, the Japanese Yen (JPY) and the Swiss Franc (CHF). Any harsh rhetoric from Iran might cause a resurgence in the safe-haven demand and further sell-off in risk assets.

On the economic data front, a very thin calendar on Friday, with only Federal Reserve Bank of Chicago President Austan Goolsbee set to speak at a Conference in Chicago. For the main part of the day, markets will be focused on any headline coming out of the Middle East. In terms of rate projections, should Oil prices remain elevated for months to come, the US Federal Reserve (Fed) might have an issue with inflation accelerating because of the rising energy component. 

Daily digest market movers: The domino has fallen

• Tensions flare up in the Middle East after Israel targeted an Iranian military airforce base and triggered a shock across the markets in several asset classes: 
  • Equities are slumping in the red.
  • Bonds are demanded, with yields declining.
  • Both the Greenback, the Swiss Franc and the Japanese Yen see substantial inflows.
  • In the commodity space, both Brent and Crude are ticking up.
• At 14:30 GMT, Federal Reserve Bank of Chicago President Austan Goolsbee participates in a moderated Q&A at the Association for Business Journalists 2024 SABEW Annual Conference in Chicago.
• Surprise comments from European Central Bank (ECB) member Edward Scicluna, who said that the ECB should even consider a 50 basis point cut at its next meeting as inflation is set to undershoot 2%.
• Equity markets are not doing well on the back of the escalation in the Middle East and trade in the red across the board. However, European and US equity futures are off their lows in the first part of European trading hours. 
• According to the CME Group’s FedWatch Tool, expectations are further cementing a no-change to the Fed’s monetary policy in June.
• The benchmark 10-year US Treasury Note trades around 4.59%, rather stable after a brief surge to 4.63% earlier on  Friday. 

US Dollar Index Technical Analysis: Rate differential remains main driver

The US Dollar Index (DXY) might be facing some selling pressure despite the current tensions escalating in the Middle East. This sounds contradictory but makes sense, seeing that bond prices are jumping higher, pushing yields lower and both the Japanese Yen and the Swiss Franc outpacing the Greenback in terms of inflows in the race to safe havens. This paints a very mixed picture, and with markets already having priced in the events from this morning, the US Dollar could be set to ease a touch, with the DXY possibly briefly sliding back below 106.00 by the close on Friday. 

On the upside, the fresh Tuesday’s high at 106.52 is the level to beat. Further up and above the 107.00 round level, the DXY Index could meet resistance at 107.35, the October 3 high. 

On the downside, the first important level is 105.88, a pivotal level since March 2023. Further down, 105.12 and 104.60 should also act as support ahead of the region with both the 55-day and the 200-day Simple Moving Averages (SMAs) at 104.17 and 103.91, respectively.