US Dollar clears Monday's losses benefited by a negative market enviroment

The DXY Index trades with gains at 102.50 after dipping to 102.10.
Markets turns risk-averse on Tuesday, seeking refuge in the US Dollar.
CPI inflation figures from December are the week’s highlight on Thursday.

Patricio Martín FXStreet

The US Dollar (USD) Index trades on an upward trajectory on Tuesday, touching the 102.50 mark and largely buoyed by the prevailing negative market sentiment that is bolstering the demand for the Greenback. Furthermore, investors are keeping a keen eye on the Consumer Price Index (CPI) outcome on Thursday as a potential determinant of the pair's movement for the next sessions.

For now, markets are betting on five rate cuts in 2024, largely dismissing the Federal Reserve (Fed) forecast of only 75 bps of easing. Strong labor market data from the US economy was largely offset by a weak US ISM PMI print, so December’s CPI reading will play a big role in shaping expectations of the central bank’s easing calendar.

Daily digest market movers: US dollar rises on negative market sentiment, eyes on CPI

The negative market mood fuels an increase in the demand for the USD as investors turn cautious ahead of CPI figures.
The December Consumer Price Index is projected to come in at 3.2% YoY, above the previous 3.1%. The core annual reading, however, is expected at 3.8%, easing from 4% in November.
US bond yields exhibit a mixed behavior, with the 2-year yield at 4.38%, the 5-year yield nearly at 4%, and the 10-year yield hovering a little above 4%.
The CME FedWatch Tool suggests that the January meeting is expected to maintain rates with low chances of a cut. Markets are now pricing in higher odds of future rate cuts come March and May 2024.

Technical Analysis: DXY Index bulls make another stride and consolidate above the 20-day SMA

The Dollar Index’s Relative Strength Index (RSI) is currently on a positive slope in positive territory, hinting at an energized buying momentum. This is further confirmed by the Moving Average Convergence Divergence (MACD) displaying rising green bars, which reinforce the building's bullish momentum. On the daily chart, the indications are that bulls are gradually reclaiming territory.

However, turning toward the Simple Moving Averages (SMAs), on a broader scope they provide a slightly contradictory outlook. Though the pair sits consolidated above the 20-day SMA, bolstering the short-term bullish viewpoint, it resides below the 100 and 200-day SMAs. This placement reveals that bears are still in command of the overall trend despite short-term bullishness.

Support levels: 102.30, 102.00 (20-day SMA), 101.80.
Resistance levels: 102.70, 102.90, 103.00.

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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