Title: US Markets Open Lower Following Record Highs, Dollar Sees Renewed Strength
Author: xStation by XTB
Original Source: https://www.xtb.com/int/market-analysis/news-and-research/us-open-correction-after-the-peak-the-dollar-is-strengthening
After headline equity indices in the United States reached historic levels last week, market participants kicked off the new week with a more cautious tone. Monday opened in the red as investors took some profits off the table and reevaluated the economic outlook in light of persistent inflation signals and the Federal Reserve’s cautious monetary stance. Concurrently, the US dollar gained renewed strength, benefiting from rising Treasury yields and shifting expectations for interest rate cuts.
The post-peak correction in markets was not unexpected. After a string of positive economic data, resilient corporate earnings, and dovish expectations earlier in the year, valuations had become stretched. Now, a combination of factors is prompting a degree of investor prudence.
Key Market Developments
Equity Index Performance:
– The S&P 500 index opened lower after hitting new all-time highs in the previous week.
– The Nasdaq 100 and Dow Jones Industrial Average also followed suit, with modest declines seen across the board.
– Investors are rotating out of high-risk technology plays and into more defensive sectors.
– These moves suggest a short-term correction rather than the start of a bear market, particularly given healthy fundamentals.
Forex Market and the US Dollar:
– The US Dollar Index (DXY), which tracks the currency against a basket of six major currencies, strengthened above the 105 mark.
– This rise continues a trend seen since the beginning of April as traders reassess the Federal Reserve’s timeline on interest rate cuts.
– The greenback has emerged stronger against both major and emerging market currencies.
– Key pairs such as EUR/USD dipped below 1.0650 while GBP/USD fell to near 1.2350.
Treasury Yields and Fed Outlook:
– US Treasury yields edged higher across all maturities, supporting dollar gains.
– The yield on the 2-year Treasury note climbed above 4.95 percent, reflecting strong rate expectations.
– Fed Chair Jerome Powell and other members have maintained that the central bank needs more evidence of declining inflation before easing monetary policy.
– As a result, market pricing for a rate cut in June has substantially diminished, and traders are now eyeing September or later for the Fed’s first potential move.
Commodities Market Impact:
Gold:
– Gold prices came under pressure as the stronger dollar and higher yields reduced the metal’s appeal.
– Despite recent gains that pushed gold to record highs above $2,400 per ounce, the precious metal corrected downward to trade closer to $2,350 per ounce.
– Investor positioning in gold suggests profit-taking activities rather than a change in long-term bullish sentiment.
Oil:
– Crude oil prices also retraced some of last week’s gains.
– West Texas Intermediate (WTI) fell towards $81 per barrel, and Brent crude slipped to around $85.
– Weaker demand data from China, along with ongoing developments in the Middle East, continue to drive volatility in energy markets.
– OPEC+ output cuts remain in place, but speculative traders appear cautious after a sharp rally earlier in the month.
Macro Drivers Influencing Markets
Several overarching themes are shaping the market narrative at present:
Inflation Persistence:
– Inflation in the US remains above the Fed’s 2 percent target, with sticky components such as housing and services inflation proving difficult to tame.
– Core PCE (Personal Consumption Expenditures) inflation, the Fed’s preferred measure, has not cooled as quickly as forecast.
– Supply-side disruptions, including elevated shipping costs and geopolitical risks, have also contributed to price pressures.
Strong Labor Market:
– The US labor market remains relatively resilient, with unemployment hovering around historical lows.
– Job openings remain elevated, bolstering consumer spending but complicating the Fed’s effort to cool demand.
Read more on EUR/USD trading.