U.S. Dollar Rallies As Walmart Disappoints

Key Insights

• U.S. dollar and Treasuries gain ground as demand for safe-haven assets increases. 
• EUR/USD is under strong pressure as European natural gas prices hit multi-month highs. 
• A move above the 107 level will push the U.S. Dollar Index towards the resistance at 108.

Walmart Cuts Guidance

The U.S. dollar is moving higher amid flight to safety which was triggered by the disappointing earnings report from Walmart.

Walmart cut its outlook for the fiscal second quarter and the full fiscal year 2023. The company’s guidance assumed “a generally stable consumer in the U.S., higher supply chain costs, continued pressure from inflation, and mix of products and formats globally.”

Walmart’s results are seen as a barometer of consumer health, so it’s not surprising to see that traders have increased purchases of the safe-haven U.S. dollar and Treasuries after the release of the report.

It remains to be seen whether Walmart’s report will have an impact on the Fed decision, which will be released tomorrow. Currently, there’s a 75.1% probability  of a 75 bps hike. If the Fed chooses to fight inflation with a 100 bps hike, the American currency will get more support.

Euro’s Problems Add To Dollar’s Strength

EUR/USD found itself under strong pressure as European natural gas prices rallied to new highs after Russia’s Gazprom reduced supplies.

ECB President Christine Lagarde has recently promised to raise rates until inflation declined to the 2% target. However, ECB will also have to deal with a recession in the eurozone, which will be triggered by high energy prices.

Raising rates at a time when the economy is shrinking will put more pressure on the Euro Area GDP. Judging by the recent market action, traders do not believe that Lagarde can afford to be hawkish.

In addition, the spread between Germany’s government bonds and the bonds of weaker members, like Italy, continues to grow. ECB has previously stated that it would buy weaker bonds to limit the spread, but such actions will further boost inflation.

In this environment, the U.S. dollar is viewed as the ultimate safe-haven currency. Currently, the U.S. Dollar Index is trying to settle back above the 107 level. In case this attempt is successful, the U.S. Dollar Index will move towards the next important resistance level at 108. However, traders should note that market action may be choppy ahead of the Fed decision on Wednesday.

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