US equities retreated yesterday—ending a six-day rally—and the US dollar weakened as the selloff in long-term US Treasuries continued. The move came amid fraught budget negotiations in Washington over deficit spending and a proposed giant tax-cut bill, further exacerbated by Moody’s recent US rating downgrade. The concern is simple: if the US can’t cut spending while also enacting sweeping tax cuts, the deficit will continue to balloon. And if markets—if investors—aren’t willing to play along, there’s little the government can do. Remember the Liz Truss mini-budget crisis in the UK? If investors say no, it’s no. At the moment, investors remain skeptical. The US 30-year yield is hovering just below the 5% mark—its highest since 2023 and edging closer to levels not seen since 2007.
In FX markets, option traders remain pessimistic about the dollar’s prospects for 2025. The one-year risk reversals—a gauge that reflects whether investors are hedging more with calls or puts—have dropped to the most negative level on record, according to Bloomberg. This is notable because risk reversals have rarely turned sharply negative in the past. Investors typically don’t hedge against dollar depreciation; historically, the greenback has attracted safe-haven flows during global market stress. But that relationship appears to be breaking down. If the dollar is no longer seen as a reliable safe haven, then investors need to hedge FX risk when buying dollar-denominated assets—even S&P 500 or Nasdaq stocks. That added demand for protection can in turn amplify pressure on the dollar.
In summary, the dollar is now facing a double whammy: downward pressure from weak growth expectations and a cautious Federal Reserve (Fed), combined with a possible erosion of its safe-haven status.
Oil jumps on Middle East rumours, USD weakens
US crude briefly spiked above its 50-day moving average (DMA) this morning following reports that Israel is preparing to strike Iran. However, crude slipped back below its 50-DMA as the bulls failed to hold the line. The medium-term outlook for oil remains bearish, weighed by uncertain global demand and ample supply. For longer-term traders, resistance sits around $65.30—the 38.2% Fibonacci retracement of this year’s decline. This level could offer selling opportunities on rebounds, unless the Middle East tensions escalate further.
Rising geopolitical tensions and fading demand for the dollar have lifted gold, the euro, the Swiss franc, and the Japanese yen. Gold climbed back above $3,300 per ounce this morning. The USD/CHF has resumed sharp declines, reigniting concerns about the competitiveness of Swiss exports and increasing the likelihood of a rate cut to 0% by the Swiss National Bank (SNB) next month. There’s also speculation that the SNB may be intervening near the 0.92 level to prevent excessive franc appreciation against the euro, as 40–45% of Swiss exports go to the eurozone.
The Euro, meanwhile, remains broadly strong. The EUR/USD has gained upward momentum since bouncing off its 50-DMA earlier this month. Trend and momentum indicators have yet to turn decisively bullish, but the RSI remains mid-range—suggesting room for further gains.
The British pound is gearing up for another test of the 1.35 level—its third attempt in the past eight months. However, sterling continues to underperform against the euro, despite recent progress in post-Brexit negotiations. This may reflect a perception that the new deal favors continental Europe, or it could be a broader vote of confidence in the euro amid the dollar’s struggles.
In Japan, the USD/JPY is sliding back toward the 140 level after breaking below 144 in Tokyo trading. The latest trade data showed a slowdown in export growth and smaller-than-expected declines in imports—likely a result of recent yen strength and rising trade tensions. While these data points hint at slower growth, Japanese bond markets are pricing in the continuation of the Bank of Japan’s (BoJ) normalization policy, with potential rate hikes to contain inflation. That expectation has pushed yields higher and is weighing on the Nikkei, which is now testing its 100-DMA to the downside.
European equities, however, are benefiting from renewed investor interest in defense stocks and the view that a stronger euro could help tame inflation in the eurozone. That, in turn, would allow the European Central Bank (ECB) to adopt a more accommodative stance.
 this morning following reports that Israel is preparing to strike Iran. However, crude slipped back below its 50-DMA as the bulls failed to hold the line. The medium-term outlook for oil remains bearish, weighed by uncertain global demand and ample supply. For longer-term traders, resistance sits around $65.30—the 38.2% Fibonacci retracement of this year’s decline. This level could offer selling opportunities on rebounds, unless the Middle East tensions escalate further.){kind=link}