US Dollar rally remains contained with slim gains


  • The US Dollar sees markets starting to take into account a delayed timing for initial Fed rate cut.
  • The Greenback is now starting to see a bit of a catch up in safe haven inflow.
  • The US Dollar Index keeps hovering around 104.50, though starts to move upwards. 

The US Dollar (USD) is heading a touch higher with Fed comments underway, as measured by the US Dollar Index (DXY), with overall no clear direction visible for this week after the standstill performance on Monday. Markets are a bit all over the place with recent polls indicating former US President Donald Trump would win if elections were held today, while equities are sliding lower ahead of Nvidia earnings on Wednesday. Add another fresh set of Fed speakers to the mix, and today’s trading could get bumpy. 

On the economic data front, no first-tier indicators are scheduled for today, and the focus will be, as mentioned above, on the Federal Reserve (Fed). On Monday, markets already heard from many Fed members, though the message was very unified in line that the Fed could still do whatever it considered appropriate to tame inflationary pressures. Of course, markets are not buying into the idea that another rate hike is on the horizon, though a “steady for a bit longer” stance is now fully priced in. 

Daily digest market movers: Fed officials say the same

  • The US Redbook Index for the week ending May 17 heads lower from 6.3% to 5.5%.
  • No less than seven Fed members are due to speak:
    • At 13:00 GMT, Federal Reserve Governor Christopher Waller said that several more months of good inflation are needed before considering to cut. Federal Reserve Bank of Atlanta President Raphael Bostic meanwhile said as well that a rate cut in his scenario is not foreseen until the fourth quarter. 
    • At the same time, Federal Reserve Bank of Richmond President Thomas Barkin delivers opening remarks at the bank's conference "Investing in Rural America".
    • Federal Reserve Bank of New York President John Williams delivers opening remarks at the 2024 Governance and Cultural Reform Conference at 13:05 GMT.
    • Fed Vice Chair for Supervision Michael Barr will discuss the economy, lessons learned from the 2023 liquidity crisis, and regional banking supervision in a fireside chat at the 2024 Regional State Member Bank Director and Executive Conference at 14:45 GMT.
    • Near 23:00 GMT, Federal Reserve Bank of Atlanta President Raphael Bostic moderates a keynote speech at the Atlanta Fed's Financial Market Conference dinner. He will be joined by Federal Reserve Bank of Boston President Susan Collins and Federal Reserve Bank of Cleveland President Loretta Mester.
  • After a rather quiet start for the US equities, the red numbers are starting to shape up more. US equities are taking over the negative performance for this Tuesday from Europe and Asia earlier. 
  • The CME Fedwatch Tool suggests a 96.4% probability that June will still see no change to the Federal Reserve's fed fund rate. Odds have changed for September, with the tool showing a 49.6% chance that rates will be 25 basis points lower than current levels.
  • The benchmark 10-year US Treasury Note trades around 4.40%, in the middle of this week's range. 

US Dollar Index Technical Analysis: Focus rather on Wednesday

The US Dollar Index (DXY) trades mixed on Tuesday, with markets holding their breath while waiting for Nvidia earnings on Wednesday. The fact that an earnings release of a single stock is the most important event shows that there are no big catalysts to deliver some sense of direction for markets. However, it is clear that since some weeks ago, markets have been happy again to head into risk-on, which amasses in an easing US Dollar overall. 

On the upside, the DXY Index is already near a chunky resistance level. The first level to recover is the 55-day Simple Moving Average (SMA) at 104.72. Further up, the following levels to consider are 105.12 and 105.52. 

On the downside, the 100-day SMA around 104.20 is the last man supporting the decline. Once that level snaps, an air pocket is placed between 104.11 and 103.00. Should the US Dollar decline persist, the low of March at 102.35 and the low from December at 100.62 are levels to consider.  

Interest rates FAQs

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.

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.

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.

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.

(This story was corrected at 11:23 GMT to say that the earnings release for Nvidia is on Wednesday)

 

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