US Dollar softer after Chicago Fed Activity Index shrinks further

The US Dollar in the middle of a patch of volatility since the Fed Minutes release on Wednesday.
Markets are chasing PMI’s from several countries throughout this Thursday.
The US Dollar Index trades just below 105.00 and could snap above if US PMI surprises.

The US Dollar (USD) is in the red after in Asian trading being in the green when it had gained momentum after the release of the US Federal Reserve (Fed) Minutes overnight, which frightened markets after several concerns were communicated on inflation by Fed officials in the paper. Markets got scared and started to head into safe havens like the Greenback. Although Nvidia earnings pushed the Nasdaq higher, a general wave of Risk On was not rippling through markets where even the Chinese semiconductor index crashed 2% in the Asia-Pacific session.

On the economic data front, a very packed agenda where markets can again revalue currencies next to each other with both European, United Kingdom’s and US Purchase Manager Index numbers for May. This will give traders a base of comparison and might see these currencies move against each other higher or lower. Besides that, weekly Jobless numbers and some Fed Activity indicators could add fuel to the fire.

Daily digest market movers: Chicago overshadows Jobless print

German Services Purchase Managers Index (PMI) surprised with an upbeat release of 53.9 against 53.2 for April, where 53.5 was expected for May. The move is particularly supportive for the Euro with Germany being labelled ‘the sick man in Europe’ these past few months.
French Services PMI stole a bit of the boost from Germany’s outperformance, because it fell back into contraction from April’s 51.3 to 49.4 against an expected 51.7 for May.
The US data has started with a mixture of data:
- Chicago Fed National Activity Index for April was a downbeat release on all fronts: The March number got revised from 0.15 to -0.04 while the actual April number sinks lower to -0.23.
- The weekly Jobless Claims have been released as well:
  - Initial Jobless Claims went from 223,000 to 215,000.
  - Continuing Jobless Claims ticked up from 1.786 million to 1.794 million.
The S&P Global preliminary PMI release for May is expected near 13:45 GMT:
- Manufacturing PMI should remain stable at 50.
- Services PMI should remain stable as well at 51.3.
- The Composite should ease a touch from 51.3 in the final April’s reading to 51.1.
Near 14:00 GMT, New Home Sales are expected to ease a touch from 0.693 million to 0.680 million for April.
The Kansas Fed Manufacturing Activity for May will come out at 15:00 GMT. The previous number was at -13, no consensus available.
To close off this Thursday, Federal Reserve Bank of Atlanta President Raphael Bostic participates in a Q&A session with students in a MBA macroeconomic class at the Stanford Graduate School of Business near 19:00 GMT.
European equities are mildly in the green while US equity futures are advancing with the Nasdaq up 1% pre-market.
The CME Fedwatch Tool is pricing 95.8% for no change in the policy rate for June. September futures are now seeing a 49.7% chance for a 25-basis-points cut.
The benchmark 10-year US Treasury Note trades around 4.43%, easing a touch.

US Dollar Index Technical Analysis: Things could get ugly

The US Dollar Index (DXY) attempted to surge towards 105.00, though saw its rally stalling just ahead of the number. The move comes after markets got concerned when reading that several Fed members had issued concerns on current inflation levels in the recent Fed Minutes. Markets were disregarding the fact that these Minutes are already nearly a month old and in the meantime several data elements have proven that disinflation is back on track, which could mean that the DXY is set to ease further from here.

On the upside, the DXY Index has broken two technical elements which were keeping price action in check on the topside. The first level was the 55-day Simple Moving Average (SMA) at 104.78 and secondly that red descending trend line crossing at 104.79 on Wednesday . From now further up, the following levels to consider are 105.12 and 105.52.

On the downside, the 100-day SMA around 104.25 is the last man supporting the decline. Once that level snaps, an air pocket is placed between 104.11 and 103.00. Should the US Dollar decline persist, the low of March at 102.35 and the low from December at 100.62 are levels to consider.

Interest rates FAQs

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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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