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US Dollar softened ahead of the weekend after mid-tier data

  • USD slid following the University of Michigan Sentiment figures and housing market data.
  • Markets remain confident about a cut in September.
  • Greenback might continue being sensitive on data releases.

On Friday, the US Dollar (USD), as measured by the US Dollar Index (DXY), experienced a decline following the release of the University of Michigan's Consumer Sentiment Index figures and softer-than-expected housing market data.

As per the US economic outlook, careful evaluation of the data suggests that the US economy is maintaining growth above trend. This portrays an overestimation by the market in pricing for aggressive easing as the Federal Reserve (Fed) remains data-dependant.

Daily digest market movers: Dollar down after mixed UoM data and soft housing market figures

  • The University of Michigan's Consumer Sentiment Index recorded an improved figure of 67.8 for early August, rising from July's 66.4. It also outperformed the market expectation of 66.9.
  • Following a decrease to 60.9 from 62.7, the Current Conditions Index illustrated a decline, while the Consumer Expectations Index registered an increase to 72.1 from 68.8.
  • In contrast, Housing Starts in the US recorded a decline of 6.8% in July, down to 1.238 million units, signaling a softened housing market.
  • Additionally, Building Permits decreased by 4% after a rise of 3.9% in June.
  • Markets remain overconfident that the Fed will rush to cut, but it will all depend on incoming data.

DXY technical outlook: Consolidation trend continues, overall bearish bias remains

Technical analysis indicates a sideways trend in the DXY with indicators showing a deep consolidation in negative terrain. The Relative Strength Index (RSI) is currently around 40 with the Moving Average Convergence Divergence (MACD) indicator’s red bars stabilizing, suggesting subdued price action. Despite gains noted on Thursday, the overall technical picture remains bearish. Buyers are struggling to make a significant move with the DXY index trading in the 102.50-103.30 channel.

Support Levels: 102.40, 102.20, 102.00

Resistance Levels: 103.00, 103.50, 104.00

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.

Author

Patricio Martín

Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.

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