US Dollar soft as markets brace for Fed's decision

The DXY trades slightly lower on Monday.
Markets digest recent inflation data and strong S&P PMIs figures.
Attention shifts to Wednesday’s Fed rate decision.

Patricio Martín FXStreet

The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, trades slightly lower on Monday after a string of data and headlines placed added attention on the upcoming Federal Reserve (Fed) rate decision. The Greenback eases off last week’s strong rally as Chinese economic data and stimulus measures bolster risk appetites.
Despite these developments, rising US Treasury yields help limit losses for the US Dollar, even as the market has priced in a cut on Wednesday. Overall, the currency remains sensitive to incoming data and central bank cues.

Daily digest market movers: US Dollar softens as markets parse hot inflation and solid growth

The US Dollar shows weakness on Monday even as the S&P Global Composite PMI rose to 56.6 in December from 54.9, while the Services PMI improved to 58.5 from 56.1. The Manufacturing PMI dipped to 48.3, highlighting a mixed backdrop ahead of the Fed decision.
Regarding last week’s data, the November Producer Price Index (PPI) rose 3.0% YoY, exceeding the 2.6% expectation with a revised 2.6% for October (previously 2.4%).
Core PPI, excluding food and energy, climbed to 3.4% YoY, beating the 3.2% forecast, and October’s figure was revised to 3.4% (was 3.1%).
Consumer Price Index data released last week showed signs of persistent price pressure, doing little to ease policymakers’ inflation concerns.
Despite the higher inflation data, markets fully price in a 25-basis-point Fed cut this week, with officials likely delivering a “hawkish cut” that sets the stage for a pause in January.

DXY technical outlook: Indicators rebound but face tough resistance

Indicators recovered significant ground last week but may lack the momentum to break above the 107.00-108.00 zone. On Monday, the Index has retreated from recent highs, reflecting a pause after last week’s rally.
Still, the outlook remains constructive if the DXY can hold above its 20-day Simple Moving Average (SMA). With mixed data and a pivotal Fed decision looming, traders may remain cautious, awaiting clearer directional cues before pushing the US Dollar materially higher.

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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