Due to US trading desks' uncertainty over how to handle the political unrest in France, the US dollar (USD) is currently trading flat to slightly negative.
Investors fled France due to worries about President Emmanuel Macron's ability to handle the prospect of a far-right-dominated parliament and his decision to call for early legislative elections.
Europe's sovereign bond spreads are getting wider still, indicating a troubled bond market. In order to maintain the coherence and alignment of the European bond market with its monetary policy, the European Central Bank (ECB) may choose to intervene if the bond market continues its downward trajectory.
Regarding economic data, the US has had a very quiet start to the week, with some lighter data to come. The Purchasing Managers Index (PMI) data on Friday and the Retail Sales on Tuesday are also important events to watch.
Traders will have to determine which will take precedence: weaker US data that would lead to a depreciation of the US dollar, or renewed political unrest in Europe that would lead to an increase in the US currency.
Can Harker assist?
European sovereign bond spreads are expanding even more than they did on Friday at the onset of the European trading session (the difference between the yields on French and German 10-year benchmark bonds is currently 80 basis points).
The European Central Bank (ECB) is facing challenges due to the variability in sovereign bond yields among member states. This is because the ECB has only one monetary policy rate that it can employ to manage inflation within the Eurozone.
ECB faces greater challenges in managing local price forces when bond spreads between countries become excessively wide and dispersed. This could result in unexpected deflation or even local inflation flare-ups.
The second possibility is that those nations may find it difficult to raise the money needed to pay off their sovereign debt on global markets, which could lead to a bank run or force the ECB to intervene and provide a lifeline to the nation in order to prevent it from going into default. Greece's experience during the 2010 sovereign debt crisis is the best illustration of that.
Not only that, but the NY Empire State Manufacturing Index for June was released at 12:30 GMT. The index contracted to 6, which is an improvement over the previous reading of -15.6.
Patrick Harker, President of the Federal Reserve Bank of Philadelphia, attends the 42nd Annual Monetary and Trade Conference of the Global Interdependence Centre at approximately 17:00 GMT.
Furthermore, the equity markets are seeking guidance. Despite the volatility in the bond market, European equities are attempting to end their run of losses. US Futures are marginally up.
There is a 33.3% chance, according to the CME FedWatch Tool, that the Fed interest rate will stay where it is in September. The odds are currently 59.0% in favor of a 25 basis point rate cut, and the very slim 7.7% chance in favor of a 50 basis point rate cut.
Additionally, the benchmark 10-year US Treasury Note increases slightly while falling to its lowest point of the month, close to 4.28%.
US dollar index rate rising from its lows
If not for the current political unrest in Europe, the US Dollar Index (DXY) is probably not where it is this Monday. If European headline risk starts to fade and US data turns softer, there is a chance of a sharp correction with a higher DXY. A fair warning, then, that the strength of the US dollar could not last long.
Positively, the levels that traders need to be aware of have not changed significantly. The first is 105.52, a barrier that was maintained for the majority of April and where the DXY is currently trading.
The next level to keep an eye on is 105.88, which set off a rejection at the beginning of May and is probably going to act as resistance once more. The largest obstacle still lies ahead at 106.51, the peak from April 16 this year.
On the negative side, Simple Moving Averages (SMA) trifecta continues to provide support. The 55-day SMA at 105.10 is the first. However, the 100-day and 200-day SMAs are forming a double layer of support to support any declines, a little lower, near 104.55 and 104.47. If there is a break in this area, search for 104.00 to make things better.