Risk aversion to drive markets

The recent escalation in the Israel-Hamas conflict has triggered a discernible “risk-off” response across global markets, significantly impacting the US dollar’s dynamics. The weekend’s unfortunate events set the tone for a week dominated by geopolitical tensions, resulting in notable market gaps at the Asian open for various risk assets, including gold, oil and major indices.

The US dollar which acts as a haven currency in conflict times, will witness increased demand. In the currency space, traders sought refuge in the US dollar, while bond investors turned to European debt, especially with US Treasurys closed for trading. The heightened geopolitical risks have contributed to sustained elevated oil prices, with WTI Crude surpassing $86.

Data to drive sentiment

The potential for a change in sentiment IN USD is closely linked to upcoming US data, particularly the Consumer Price Index (CPI) or Consumer Sentiment. A weaker-than-expected CPI due this week or a dip in consumer sentiment could provide an opportunity for USD bears to regain control. Conversely, strong numbers may rejuvenate bullish momentum for the USD, although the Dollar Index crossing the 107.00 mark could encounter resistance. The University of Michigan’s Consumer Sentiment Index, due for release, offers a forward-looking glimpse into consumer confidence. If sentiments reflect worries over high-interest rates, it might impact spending, potentially affecting economic dynamics.

FOMC meeting minutes to Dollar Index 

The Federal Reserve’s recent hawkish stance had a notable impact on the dollar and bond yields. The upcoming release of the Federal Open Market Committee (FOMC) meeting minutes provides an opportunity to delve deeper into the Fed’s perspective. Analysts and traders will scrutinize these minutes for any hints on future monetary policy directions. While the market has adjusted to a less dovish outlook, any unexpected hawkish signals may still impact the USD.

Current events underscore the intricate relationship between geopolitical events, key economic data, and the USD’s role as a safe-haven currency. As the Israel-Hamas conflict unfolds, market participants brace for potential shifts in the currency landscape. While acknowledging that rates may not have peaked, especially considering the upward pressure on inflation fueled by the geopolitical turmoil.

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