- The DXY Index is witnessing mild losses after concluding its weakest week in over a month.
- US PCE inflation report and housing data are next on the investors’ radar.
- Several Fed speakers where on the wires delivering mixed signals
The US Dollar (USD) took a slight downturn in the early part of the week, bracing itself before the release of the Personal Consumption Expenditures (PCE) Price Index data on Friday, which is the Federal Reserve (Fed) preferred gauge of inflation. Inflation figures will give additional insights to investors to continue placing their bets on the next Fed decisions. The US Dollar Index is trading at the 102.50 area, 0.1% down on the day.
In the last 2023 meeting, the Fed’s dovish stance emerged, with officials forecasting 75 bps of rate cuts for 2024, recognizing that inflation is softening, which fueled risk on flows that significantly pushed the DXY downwards. However, markets may be overhyped with the dovish surprise, as the bank may consider delaying cuts if inflation remains sticky, so Friday’s figures will be important.
Daily Market Movers: US Dollar remains weak on the back of the Fed’s dovish surprise
- The US Dollar experienced mild losses as the week kicked off, with traders awaiting the release of the PCE Price Index data.
- The US will report mid-tier housing figures on Tuesday and Wednesday that may impact Greenback’s price dynamics.
- The Q3 Gross Domestic Product final revision is due on Thursday.
- In the meantime, US bond yields are trending upwards, with the 2-year yield at 4.44%, the 5-year yield at 3.95%, and the 10-year yield at 3.95%, which may limit the downside of the US Dollar.
- The CME FedWatch Tool insights indicate that markets are considering possible rate cuts by March 2024.
- Mary Daly from San Francisco’s Fed argued on Monday that fewer cuts would be warranted if inflation progress stalls but that three rate cuts could be needed in 2024 to avoid over-tightening.
- Chicago’s Fed Goolsbee commented that the US made significant progress on inflation adhering to the signalled rate cuts but that he was “confused” with the market reaction.
Technical Analysis: DXY index shows a bearish short-term outlook, sellers maintain control
The indicators on the daily chart reflect a stronger selling momentum on the DXY. The Relative Strength Index (RSI) is in negative territory with a downward slope, indicating an inherent bearishness in the index. The red bars of the Moving Average Convergence Divergence (MACD) further confirm this bearish momentum.
The position of the index with respect to its 20, 100, and 200-day Simple Moving Averages (SMAs) also highlights the continuing dominance of the bears. The DXY trading beneath all these SMAs implies a strong downward bias, affirming the bearish undertone.
Support levels: 102.00,102.30, 101.50.
Resistance levels: 103.45 (20 and 200-day SMA bearish crossover), 104.60 (100-day SMA), 104.80.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
Source: https://www.fxstreet.com/news/us-dollar-starts-the-week-on-the-defensive-markets-await-pce-inflation-data-202312181757