On turnaround Tuesday, the USD Index (DXY) continued its downward trajectory, shedding further ground and breaking below the crucial support level of 102.00. This decline has led to the printing of new 2-month lows. The drop in the USD Index can be attributed to the prevailing risk appetite among investors, favoring risk-associated assets over the safe-haven US dollar. The implications of this decline on the South African market are significant, as investors closely monitor global currency trends.
Factors Affecting the USD Index
The ongoing sell-off of the US dollar can be attributed to several key factors. Firstly, investors’ appetite for riskier assets has increased, leading to a shift away from the safe-haven status of the US dollar. Secondly, US yields have been correcting lower from recent peaks, contributing to the downward pressure on the greenback. Lastly, market participants are eagerly awaiting the release of crucial US inflation figures, which could further influence the trajectory of the USD Index.
Expectations for Fed’s Monetary Policy
The Federal Reserve’s upcoming July 26 meeting is expected to result in a 25 basis point rate hike. This anticipation is driven by positive US fundamentals, such as robust employment and rising prices. Federal Reserve Chairman Jerome Powell’s remarks at the June FOMC event reinforced these expectations, as he referred to the July meeting as “live” and indicated that most Committee members are prepared to resume tightening measures as early as next month. These factors contribute to the pessimism surrounding the USD Index.
Implications for South African Markets:
The performance of the USD Index has implications for the South African market, as investors closely monitor global currency trends. A weaker US dollar can have both positive and negative effects. On one hand, it may benefit South African exporters, as a weaker dollar can improve their competitiveness in international markets. On the other hand, importers may face challenges due to potential currency fluctuations. South African investors and businesses should carefully evaluate the impact of the USD Index’s decline on their portfolios and adjust their strategies accordingly.
Key Events and Levels to Watch
In the US, upcoming events include the release of MBA Mortgage Applications, Inflation Rate, and the Fed’s Beige Book. These releases will provide further insights into the state of the US economy and can impact the trajectory of the USD Index.
Regarding levels to watch, immediate support for the USD Index lies at 101.67, which marks the monthly low on July 11. Further support can be found at 100.78, representing the 2023 low on April 14. A breakthrough below these levels could potentially test the key support at 100.00. On the upside, a breakout above 103.54 would open the door for potential gains towards 104.56 and then 104.69.
Conclusion
The USD Index’s decline to 2-month lows is driven by investors’ risk appetite and expectations regarding the Federal Reserve’s monetary policy. South African investors should closely monitor these developments as they can significantly impact the performance of the country’s currency and have implications for various sectors of the economy. By staying informed and assessing key levels and upcoming events, investors can make informed decisions to navigate the potential effects of the USD Index’s movements on the South African market.
