- The DXY Index rose to 103.60 during the press conference.
- The Fed held rates steady as expected in the 5.25%-5.50% range.
- Powell considered "not likely" a cut in March
The US Dollar (USD), as reflected by the DXY Index, is currently trading at 103.60, with 0.20% gains following the Federal Reserve (Fed) decision to hold its rates steady as expected. During the press conference Powell left the door open for rate cuts which was taken as markets as dovish which initially weakened the US Dollar. However, he considered "not likely" that the bank will achieve a level of confidence in March to start cutting which fueled a recovery.
Market anticipation regarding the Fed's future decisions are shifting but remain restrained due to robust recent economic data, suggesting that earlier rate cuts are unlikely. The upcoming jobs and inflation data are expected to further steer market sentiment and shape the easing cycle from the Fed.
Daily Digest Market Movers: US Dollar gains as markets digest Powell's words
- Chair Powell was seen confident that inflation was going in the right direction but that he needed additional evidence to declare victory.
- However, he commented that infaltion will likely reach the bank's target which would make the bank consider cutting rates.
- Regarding employment, he added that he wasn't looking for a slide in employment and that in case of weakening the committee would consider easing.
- Earlier in the session, the ADP Employment Change for January reported by the US significantly missed expectations, with only 107K jobs added as compared to the consensus of 145K and previous figure at 158K.
- On Thursday, markets will receive additional weekly Jobless Claims data; and on Friday, January’s Nonfarm Payrolls figures.
- As for now, the CME FedWatch Tool, the odds of a rate cut in the March meeting, rose to 57%.
Technical Analysis: DXY loses momentum, must defend the 200-day SMA
The indicators on the daily chart are reflecting a mixed bag of signals. The Relative Strength Index (RSI), despite its negative slope, is in positive territory. This typically indicates dwindling bullish momentum as buyers lose strength. The Moving Average Convergence Divergence (MACD) presents a similar view as the diminishing green bars could suggest that buying momentum is struggling to keep up its pace.
The Simple Moving Averages (SMAs) reveal a somewhat bearish scenario in the larger picture. The DXY's position under both the 100 SMAs showcases the bears' dominance in medium time frames. However, the index still remaining above the 20-day SMA reinforces that the bears still aren’t fully in command and will act as strong support in case of further downward movements. If the buyers manage to defend the 200-day average, the downside will be limited.
Support Levels: 103.40 (200-day SMA),103.30, 103.15.
Resistance Levels: 103.90,104.00,104.20.
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.
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