US Dollar finds demand as robust labor market and sticky inflation expectations warn markets

The DXY Index rose to 103.90, up by 0.30%.
US weekly Initial Jobless Claims came in better than expected, but Durable Goods Orders from October were disappointing.
US yields are higher, favouring the Greenback’s advance.

On Wednesday, the US Dollar found momentum after the report of positive weekly Initial Jobless Claims from the US, which flashed further warning among investors regarding further tightening from the Federal Reserve (Fed).

The labor market in the United States is showing signs of resilience, and despite the evidence of inflation, it might make Fed officials consider further tightening, which seems to be spooking investors. In addition, the University of Michigan (UoM) revealed that the 5-year inflation expectations remained steady at 3.2% YoY, favouring the Fed's stance to not to call to early a victory, as those expectations remain well above the bank's 2% target.

Daily Digest Market Movers: US Dollar finds a lift on better-than-expected Initial Jobless Claims

The US Dollar DXY Index trades neutrally around 103.50.
Initial Jobless Claims in the US for the week ending November 18 were lower than expected at 209,000, marking the lowest level in five weeks.
Durable Goods Orders in the US dropped by 5.4%, exceeding the forecasted 3.1% contraction, following a previous month's increase of 4.6%.
Despite the decline in Durable Goods Orders, the US Dollar strengthened against other currencies, with the DXY index climbing to 104.10, showing a 0.50% rise.
The Federal Open Market Committee's November Minutes revealed that officials were concerned about inflation and needed to see more evidence to be convinced that inflation is coming down.
The 2, 5 and 10-year rates increased to 4.96%, 4.46% and 4.43%. Still, markets are confident that the Federal Reserve won’t hike in November and are betting on rate cuts sooner than expected in May 2024. A sizable minority is even betting on a rate cut in March.

Technical Analysis: US Dollar bulls see some light, bears still show dominance

The technical landscape of the DXY daily chart delivers a mix of bullish and bearish signals. The Relative Strength Index (RSI) standing flat near oversold conditions indicates a potential weakening of the selling momentum. This could suggest an imminent reversal, a classic sign that buying pressure could soon resurface. Contrarily, the flat red bars of the Moving Average Convergence Divergence (MACD) hint at a short-term bearish bias, suggesting that sellers might be in control of the immediate market. Yet, it is important to bear in mind that the index’s continuous flat nature could turn either way.

Furthermore, the DXY's position below the 20 and 100-day Simple Moving Averages (SMAs) can be perceived as a bearish signal. However, it currently sits above the 200-day SMA, suggesting that bulls hold the fort on a broader time frame with the underlying trend remaining upward.

Support levels: 103.60 (200-day SMA), 103.30, 103.15.
Resistance levels: 104.00, 104.20 (100-day SMA),104.50.

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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