US Dollar edges lower after Japan’s Nikkei prints worst performance since 1987

• The US Dollar cracks under pressure as investors flee to safe-haven bonds. 
• Markets are spooked by recession fears after several worrying US data releases last week. 
• The US Dollar index falls below 103.00 on Monday after a bad Asian session. 

The US Dollar (USD) sinks lower on Monday, continuing the trend from Friday. The main trigger is the gruesome performance of the Japanese Nikkei and Topix Indices, which closed down over 12% in blood-red numbers. For the Nikkei, it is the worst performance since 1987, pushing investors and traders into safe-haven bonds. With falling yields, the US Dollar is losing its strength as a batch of weak US economic data and lower yields no longer make the Greenback shine. 

On the economic front, the week starts with a big batch of data from the Institute of Supply Management (ISM). Traders will be shaking in their boots as the numbers come out, as another batch of disappointing data could further confirm the recession narrative. Luckily, this week does not hold any further first-tier data points, so dust could settle later in the week. 

Daily digest market movers: Gearing up from the start

• Markets are in panic mode on Monday after Japanese indices closed down by over 12%. Traders even priced in a 60% chance for an emergency rate cut in August at one point, Bloomberg reported.
• At 13:45 GMT, the final readings of the S&P Global Purchasing Managers Index (PMI) for July will be released:
  • Services PMI is expected to come at 56.
  • The Composite number is expected to remain stable at 55.
• At 14:00 GMT, the Institute for Supply Management (ISM) will release its numbers for July:
  • The Services Employment Index is expected to head to 46.5 from 46.1.
  • Services New Orders Index was at 47.3 previously, with no forecast available.
  • The Services PMI should head out of contraction to 51 from 48.8.
  • Services Paid Index should ease a touch to 55.8 from 56.3.
• Equity markets are falling out of bed on Monday, with the Japanese Nikkei facing its worst performance since 1987. US equities are down with the Nasdaq leading the charge with a 4% decline. European equities are facing milder losses, down 2.5% on average.
• The CME Fedwatch Tool shows a 96.5% chance of a 50 basis points (bps) interest rate cut by the Federal Reserve  in September.  Another 50 bps cut is expected in November by 78.6%, while a 20.6% chance of just a 25 bps cut is priced in that month. 
•  The US 10-year benchmark rate trades at a new 52-week low at 3.73%.   

US Dollar Index Technical Analysis: Markets choking

The US Dollar Index (DXY) has cracked under pressure after the underperforming US economic data releases last week. On Monday, the equity rout continues and drags the Greenback lower. There are no clear support levels nearby, although the Relative Strength Index (RSI) points to the end of the sell off, with losses in Europe and the US for now being contained on the equity markets. 

The recovery will be in three tiers, with the first up at 103.18, which was held on Friday though snapped on Monday in the Asian hours. Once the DXY closes above that level, next up is 104.00, which was the support from June. If the DXY can make its way back above that level, the 200-day Simple Moving Average (SMA) at 104.22 is the next resistance level to look out for. 

On the downside, the oversold RSI already should refrain the DXY from making more hefty losses. Support nearby is the March 8 low at 102.35. Once through there, pressure will start to build on 102.00 as a big psychological figure, before testing 101.90, which was a pivotal level back in December 2023 and January 2024.

US Dollar Index: Daily Chart