US Dollar extends gains as markets await Fed and CPI figures


  • USD extends its previous profits, continuing on a winning streak.
  • US economy still shows strength, May's Consumer Price Index remains focal point.
  • Fed's projections for the economy will be closely watched on Wednesday, but decision is expected to be a hold.

On Monday, the US Dollar Index (DXY) saw a hike, moving further up toward the 105.23 area, following the streak from Friday's rally. Despite some initial fluctuations, the broader perspective of the robust US economy remains strong, thus hinting at maintaining the USD gains.

Market participants are still keeping their focus mostly on the Consumer Price Index (CPI) for May and the Federal Reserve (Fed) meeting, both on Wednesday. As Monday's session didn't offer any major highlights, investors' eyes are glued to these upcoming events. The anticipated data along with the decision will provide a clearer image of the inflation rate and the potential changes in the monetary policy trajectory.

Daily digest market movers: DXY gains momentum, awaiting Wednesday's session

  • Core CPI data prediction for May is currently at a slight slowdown to 3.5% YoY, while the overall inflation is expected to stand firm at 3.4%.
  • Fed is presumed to retain interest rates at 5.5% in the June 15-16 meeting. Any deviation in this forecast could cause significant shifts in market activity.
  • The Summary of Economic Projections and comments by Fed Chairman Jerome Powell should be key in understanding the economic future more comprehensively.

DXY technical analysis: Dollar Index recovers to positive ground post previous surge

The DXY Index has not only managed to stay afloat but has also recovered to a stronger position on the chart. The index stands above the 20, 100 and 200-day Simple Moving Averages (SMA), reinforcing the bullish outlook.

Additionally, the Relative Strength Index (RSI) manages to stay over 50, backing up the bullish sentiment further. The Moving Average Convergence Divergence (MACD) indicates the presence of increased demand at its current levels.

 

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.

 

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