US Dollar starts the week firm on strong ISM Services PMIs

  • The DXY rose by more than 0.50% to 104.50 on Monday.
  • The US service sector continues to show robustness, making markets disregard an interest rate cut in March.
  • US Treasury yields continue to rise, boosting the Greenback.

The US Dollar (USD) measured by the DXY index rose on Monday to 104.50, its highest level since mid-November. This upswing has been attributed to the fortifying ISM Services PMI for January, giving the Dollar Index an advantageous boost via markets giving up on hopes of an interest rate cut in March.

The US Federal Reserve's hawkish hold, justified by a robust jobs report and continuous strong growth in Q1, is making any imminent rate cuts implausible, contradicting previous market expectations. Federal Reserve (Fed) Chair Powell maintains cautiousness, emphasizing the need to observe inflation’s sustained drop toward the 2% core target.

Daily digest market movers: US Dollar gains additional ground as Services PMI comes in higher than expected

  • January's ISM Services PMI recorded 53.4, beating the consensus figure of 52 and last month's 50.5, as reported by the Institute for Supply Management (ISM).
  • US bond yields continue to rise to monthly highs with 2-year, 5-year and 10-year bonds trading at rates of 4.45%, 4.11% and 4.15%, respectively. All three rates are up by more than 2%, which is making the US Dollar attractive for foreign investors. 
  • CME's FedWatch Tool hints at lesser odds for a rate cut in March, currently standing at 15%. Those odds rise to 50% in May, but the probabilities of a hold are also high.

Technical analysis: DXY bulls extend gains and recover the 20-day SMA

The indicators on the daily chart reflect a potential shift in momentum in the short term. The Relative Strength Index (RSI) is nearing overbought conditions, which typically suggests that buyers may be losing their grip, although it does not immediately indicate a trend reversal. 

However, evaluating the broader scale technical outlook paints a slightly different picture. The index now stands  above the 20,100 and 200-day Simple Moving Averages (SMAs), suggesting a strong and sustained push from the bulls. This can be interpreted as a bullish signal on a broader outlook. 

The overall combination of these indicators suggests that despite the RSI nearing overbought territory, the buying momentum, backed up by the rise in the Moving Average Convergence Divergence (MACD)  and the position above the SMAs, is the more dominating force. Bulls look set to maintain control for now, especially as they continue recovering, which can often incite additional buying interest. That being said, traders should eye a potential reversal, due to indicators nearing overbought conditions.



US 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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