US Dollar starts the week soft ahead of CPI figures

The DXY Index declines toward 102.15, challenging 20-day SMA.
Lower US Treasury yields weigh on the Greenback.
Raphael Bostic from Atlanta's Fed signaled only two rate cuts in 2024 but didn't trigger a reaction on the USD.
Investors eye Thursday’s CPI data from the last month of 2023.

Patricio Martín FXStreet

The US Dollar (USD) is currently trading at the 102.15 area, seeing losses due to bulls struggling to sustain the momentum gained last week. Monday’s calendar has nothing relevant to offer, and the focus is set on the Consumer Price Index (CPI) figures from December, due on Wednesday.

In its last 2023 meeting, the Federal Reserve (Fed) mirrored a dovish stance, welcoming moderating inflation and projecting no rate hikes in 2024 alongside a forecasted 75 bps of easing. Current market expectations predict a March rate cut and another in May, hinging on December's CPI report. This dovish posture, coupled with anticipation of impending rate cuts, contributes to a weaker US dollar as lower interest rates decrease foreign investment appeal.

Daily digest market movers: US dollar hesitates ahead of CPI

The US Dollar is struggling to hold last week's gains, which closed 1% up on Friday.
Markets await key inflation data, which is expected to have picked up in the last month of 2023. The core measure is forecasted to be 3.8% YoY.
US Treasury yields experienced a drop, with the 2-year yield at 4.32%, the 5-year yield at 3.94%, and the 10-year yield at 3.98%, adding pressure to the USD.
According to the CME FedWatch Tool, the Federal Reserve's easing expectations also started to adjust last week. Five rate cuts are now priced in for 2024. Investors are pricing in a hold at the upcoming January meeting but anticipate higher chances of rate cuts in March and May.

Technical Analysis: DXY bears step in as bulls continue weak showing

The indicators on the daily chart reflect a bearish outlook for the USD. The Relative Strength Index (RSI) is currently demonstrating a negative slope in negative territory, which is backed by the bearish sentiment indicated by the Simple Moving Averages (SMAs) and the Moving Average Convergence Divergence (MACD) indicator’s rising red bars.

The index's position above the 20-day SMA while below the 100 and 200-day SMAs indicates that buying pressure is losing momentum to selling pressure in the medium and long-term time frames. This is a signal that the bears are maintaining some dominance.

Support levels: 102.10,102.00,101.80.
Resistance levels: 102.30,102.50, 102.70.

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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