US Dollar closes a losing day while markets await key labor market figures

The DXY Index shows losses, trading near the 103.05 area.
Weekly Jobless Claims came in higher than expected.
Markets still digesting Wednesday’s Fed decision and Powell's words.

Patricio Martín FXStreet

The US Dollar (USD) is currently trading at 103.05, with a declining trend, largely triggered by the release of soft labor market data on Thursday that outshadowed strong ISM PMIs figures. Markets are still digesting Federal Reserve (Fed) chair Jerome Powell’s words from Wednesday, which helped the index jump toward 103.80.

Fed Chair Powell reinforced the idea that a rate cut in March is unlikely despite ongoing market speculation. Nevertheless, he noted rate adjustments remain primarily data-dependent, with upcoming jobs data setting the pace of the US Dollar and expectations for the short term.

Daily Digest Market Movers: US Dollar declines following weak labor market figures

The ISM Manufacturing PMI for January came in at 49.1, lower than the consensus estimate of 47 but slightly higher than the previous figure of 47.1.
The initial Jobless Claims for the week ending in January 27 reported by US Department of Labor are at 224K, higher than the consensus forecast of 212K and the previous figure of 215K.
Investors are keenly awaiting the January Nonfarm Payrolls report due on Friday to continue placing their bets on the next Fed decisions.
As for now, markets are seeing the easing cycle starting in May, but the odds of a cut in March are still high around 40%, according to the CME FedWatch Tool.
In case Friday’s labor market figures come in weaker than expected, the dovish bets on the Fed may rise, applying further pressure on the USD.

Technical Analysis: DXY bears step in to push the index below 200-day SMA

The indicators on the daily chart are reflecting a tentative dominance of selling momentum in the short term. The Relative Strength Index (RSI), albeit on a negative slope, is holding in positive territory, reflecting dwindling buying momentum. This is further supported by the Moving Average Convergence Divergence (MACD) indicator, which showcases decreasing green bars, an indication that the selling pressure is slowly gaining traction.

Furthermore, the positioning of the index concerning its 20,100 and 200 Simple Moving Averages (SMAs) points to a bullish hold in the broader context. The pair still holds above the 20-day SMA, signaling that the bears have failed to command complete control in the short term. However, the DXY's positioning below the 100 and 200-day SMAs suggests more dominant selling momentum in the longer-term.

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.

Author

Patricio Martín

FXStreet

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

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