• DXY rally sees minor pullback on Monday but is set to continue its upward journey this week.
  • Fed maintains that only one rate cut is expected in 2024, conflicting with market expectations.
  • US Treasury yields continued rising, gaining more than 1% on Monday.

On Monday, the US Dollar Index (DXY) experienced some pullback but maintained overall strength. Tracking the previous week's performance, the DXY was influenced by the hawkish Federal Reserve (Fed) and the risk-off impulses from Europe. These two driving factors are expected to continue influencing the Index, allowing the US Dollar rally to proceed. It's worth noticing that the Index, on Friday, closed at its highest level since early May and is expected to retest the April-May highs near 106.50.

The US economic outlook persists in a state of ambiguity. The Fed continues to keep its economic indicator projections unchanged but revised its forecast for Personal Consumption Expenditures (PCE) higher. Primarily, soft inflation levels combined with a robust labor market illustrate the mixed dynamic of the US economic landscape.

Daily digest market movers: DXY slightly pulls back after strong week

  • Fed perceives only one rate cut in 2024 compared to the market's prediction of two. This discrepancy will be influenced heavily by emerging financial data.
  • Investors are awaiting critical reports, namely June's Consumer Price Index (CPI) and PCE, which will be key for timing of interest rate cuts. The odds of a cut at the July meeting remain low at 10%.
  • An upcoming cut will also depend on July’s CPI and PCE, ahead of the Fed's meeting on September 17-18. The odds for a rate cut at this meeting are currently near 75%.
  • US Treasury yields are following an uptrend, with the 2, 5 and 10-year yields reported at 4.47%, 4.30%, and 4.28%, respectively, with large gains.

DXY technical analysis: Bulls pause, outlook still positive

The technical indicators presented a pause in Monday's session but maintained an overall positive standpoint. The Relative Strength Index (RSI) continues to hold above the 50 level, and the Moving Average Convergence Divergence (MACD) continues to present green bars. This implies that the bulls remain strong, which leaves the door open for additional gains.

Furthermore, the DXY remains above its 20, 100 and 200-day Simple Moving Averages (SMA), which combined with investors taking a breather supports a bullish stance for the DXY.

 

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.

 

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