US Dollar trims daily gains, holds near monthly highs

The US Dollar traded strongly against its rivals on Thursday, and the DXY index rose to monthly highs.
GDP and Durable Goods data came in higher than expected as well as the weekly Initial Jobless Claims.
Despite strong data, US bond yields and hawkish bets on the Fed declined, preventing the USD from climbing higher.

Patricio Martín FXStreet

The US Dollar (USD) measured by the US Dollar Index (DXY) rose toward 106.90, its highest level since early October, seeing nearly a 0.3% gain and then settled at 106.60 on Thursday. Since Tuesday, the DXY index has gained more than 1%, and the Greenback is outperforming its rivals as strong economic data increases its demand. However, dovish bets on the Federal Reserve (Fed) may limit those gains.

The United States economy is holding resilient and has yet to show signs of weakness from the Fed’s aggressive monetary tightening. During this week, the US reported that the S&P PMIs from October came in higher than expected, and the preliminary estimation of the Q3 Gross Domestic Product (GDP) also trounced consensus. On Friday, the US will release Personal Consumption Expenditures (PCE) figures from September, which may have an additional impact on the Greenback’s price dynamics.

Daily Digest Market Movers: US Dollar outperforms its rivals as Q3 GDP came in strong

The DXY index continued climbing higher to a high of around 106.90 and then stabilized at 106.60, holding onto daily gains.
On the data front, the Q3 GDP preliminary estimate showed that the economy grew at an annualised rate of 4.9%, higher than the 4.2% expected.
In addition, The U.S. Census Bureau reported that Durable Goods Orders from September exceeded expectations. It came in at 4.7% MoM vs the expected 1.5%.
On the negative side, weekly Initial Jobless Claims arrived at 210,000 vs the 208,000 expected.
Meanwhile, US bond yields are falling. The 2-year rate fell to 5.04%, while the longer-term 5 and 10-year rates retreated toward 4.79% and 4.85%, respectively, contributing to the USD losing momentum.
According to the CME FedWatch Tool, the odds of a 25-basis-point hike in December are still low, around 20%. In addition, the CME Group data suggests that a pause in November is nearly priced in.
Investors await the Personal Consumption Expenditures figure from September on Friday to continue modelling their expectations on the next Fed decisions.

Technical Analysis: US Dollar Index continues gaining ground above the 20-day SMA

According to the daily chart, the technical outlook for the DXY Index remains neutral to bullish as the bulls are recovering ground and assert themselves above the 20-day Simple Moving Average (SMA). The Relative Strength Index (RSI) exhibits a positive slope above the 50 threshold, while the Moving Average Convergence (MACD) displays lower red bars. To add to that, the pair is above the 20,100 and 200-day SMAs, suggesting that the bulls are firmly in control of the bigger picture.

Supports: 106.35 (20-day SMA), 106.00, 105.70.
Resistances: 107.00, 107.30, 107.50.

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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