US Dollar Dips Under Key Support Level

The financial week started on a cautiously optimistic note, with European and US stocks registering slight increases. However, investor sentiment was somewhat dampened by the announcement of stricter capital requirements for US banks. This news impacted the performance of several mega-cap companies, with tech giants such as Tesla and Amazon recording losses during the trading session. In contrast, Meta (formerly Facebook) saw its stock advance by 1.23%.

The stricter capital requirements were announced by Michael Barr, who plans to recommend more stringent rules for banks with assets exceeding $100 billion. These new regulations will take into account unrealized losses and gains on security portfolios, a significant shift that could have potentially prevented the collapse of institutions like Silicon Valley Bank. However, this change could also exert pressure on banks that have heavily invested in US treasuries.

Despite the implications of these proposed regulations, major banks such as JP Morgan and Citi remained relatively unaffected and did not react aggressively to the news. Similarly, smaller regional bank stocks demonstrated resilience in the face of this development. Nevertheless, the Federal Reserve’s commitment to higher interest rates could put additional strain on lenders, especially those operating on a regional scale.

Simultaneously, the financial landscape saw a reassessment of recent hawkish expectations from the Federal Reserve. This recalibration was prompted by a 4.2% drop in used-car prices in June – the largest such decline since the onset of the pandemic. Additionally, a survey by the New York Fed revealed a decline in inflation expectations for the next year, although three-year projections rose marginally to 3%. The survey also indicated increased pessimism about the job market and decreased expected spending growth over the next year.

In response to these developments, capital began flowing into treasuries, causing the US 2-year yield to decline by about 10 basis points. Despite the hawkish expectations from the Federal Reserve, the US dollar dipped under a key support level in a long-term ascending channel. Bearish investors are now targeting the 100 level.

Meanwhile, the EURUSD rallied past the 1.10 mark despite a deteriorating sentiment index for July in the Eurozone. German CPI data due today is likely to confirm a rebound in inflation. While higher German inflation is generally positive for the euro, it remains uncertain whether Christine Lagarde or her colleagues at the ECB will pay significant attention to sentiment indicators. Despite hawkish expectations from the Fed, a weakening US dollar coupled with hawkish expectations from the ECB could further drive the EURUSD toward the 1.12 mark.