US Dollar prints yearly low against the Euro on the back of dropping US inflation
|- US Dollar is knocked out against all major currencies.
- Traders are digesting a lower US inflation print for both the core and overall inflation.
- The US Dollar Index nosedives lower and is set to break 101 at any moment.
The US Dollar (USD) is being thrown in the bin by traders as markets are doubling down on their bets for only one more rate hike from the Federal Reserve. All metrics in the US inflation report came out below expectations and seem to support the positioning of the markets based on the CME Fed futures. The US Dollar Index (DXY) broke firmly below 101.50 and is on its way trading below 101.00, making it a fifth consecutive day of losses.
All eyes will now move to the several Fed speakers that are aligned in order to hear if they still stick to the same message US Fed chairman Jerome Powell was communicating past few weeks. The official stance is still that the Fed wants at least two more rate hikes before it considers to be done with its hiking cycle. These inflation data points could create some opposition within the Fed committee and start seeing more vote splits or even another pauze into the next meetings.
Daily digest: US Dollar flirting with substantial levels
- Fed's Tom Barkin of the Federal Reserve Bank of Richmond said backing off too soon on rates would require Fed to do even more in the future. The US inflation rate is still too high. Meanwhile Neel Kashkari of the Ninth District Federal Reserve Bank at Minneapolis said that banks need to be ready for entrenched inflation.
- China premier meets major internet companies and vows more support. Meanwhile the China state fund has cut exposure against weak builder firms.
- Some mild data to start the day came in at 11:00 GMT with the Mortgage Bankers Association issued the Mortgage Applications for the first week of July. The number of applications jumped from -4.4% to 0.9%.
- US Consumer Price Index (CPI) coming in in at 3.0%, down from 4.0% previous month on the overall segment measured on a yearly basis. The core CPI number dropped from 5.3% to 4.8%. On a monthly basis, the overall CPI basket went from 0.1% to 0.2%, still below the 0.3% expected. THe core went from 0.4% to 0.2%. The sticky inflation looks to be losing its grip.
- Market reaction on the back of the US inflation report sees equities jump higher, rates drop lower and the US Dollar ekes out more losses against all major currencies.
- Raphael W. Bostic from the Federal Reserve Bank of Atlanta will speak around 17:00 GMT at the Atlanta’s Fed Payments Forum. To close off the batch of Fed speakers, president of the Federal Reserve Bank of Cleveland Loretta Mester will speak on FedNow at 20:00 GMT.
- The US Treasury is set to access the markets as well in order to allocate a 10-year bond auction.
- The Japanese Topix heads lower and closes this Wednesday off by -0.67% after Machine Orders sinked into negative territory. China on the contrary was able to again eke out gains above 1%. European equities firmly in the green and US futures are shooting higher on the back of that weaker inflation report.
- The CME Group FedWatch Tool shows that markets are pricing in a 92.4% chance of a 25 basis points (bps) interest-rate hike on July 26. Chances of a second hike in November are down to 26.7%. It appears that markets are pricing out again the possibility of a second rate hike and presume that the Fed will hike in July for the last time. Markets expect US Fed Chairman Jerome Powell to announce that the pivotal level has been reached at the yearly Jackson-Hole Symposium between August 24 and 26 in Kansas.
- The benchmark 10-year US Treasury bond yield trades at 3.91% and is continuing its slide lower from 4.09% last week. Traders are again doubling down on whether there will be more than one rate hike from the Fed.
US Dollar Index technical analysis: Dollar snaps 101.00
The US Dollar is getting the final blow needed to make it perform a nosedive move. The US inflation report shows abating inflation, and means that the US Dollar is no longer a currency with much more higher interest rate potential as the Fed will soon start to pauze after a last or second-to-last hike. With the Greenback takign a ferm step back, even by more than 1% in some pairs, the US Dollar Index (DXY) is tanking to 101.00 and could break through it once the US session fully takes over and continuous the selloff in the Greenback.
On the upside, look for 102.811 at the 55-day Simple Moving Average (SMA) that will partially re-gain its importance after having been chopped up that much a few weeks ago. Only a few inches above the 55-day SMA, the 100-day SMA comes in at 102.93 and could create a firm area of resistance in between both moving averages. In case the DXY makes its way through that region, the high of July at 103.57 will be the level to watch for a further breakout.
On the downside, 101.50 has been broken and the US Dollar price action is starting to get into orbit around 101.00. Once that level is breached, expect to see the Greenback printing near one-year-lows against most major pairs. Special notice for 100.75, as that level has been a floor since February 2nd and could open the door for a slide below 100.00 once broken through it.
Interest rates FAQs
What are interest rates?
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.
How do interest rates impact currencies?
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.
How do interest rates influence the price of Gold?
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.
What is the Fed Funds rate?
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.
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