US Dollar edges lower ahead of Fed's decision

The DXY Index trades with a neutral bias near 103.40 with mild losses.
Wednesday’s FOMC decision and labor market data will play a pivotal role.
Low tier data including labor, housing and consumer confidence figures came in mixed.

Patricio Martín FXStreet

The US Dollar (USD) Index trades around 103.40 on Tuesday, with mild losses after the release of low-tier data. The two-day Federal Reserve (Fed) meeting kicked off on Tuesday and ends on Wednesday with a press conference from Fed Chair Jerome Powell. This makes the markets turn cautious, lending some support to the USD.

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 FOMC decision and jobs data are expected to further steer market sentiment and shape the easing cycle from the Fed.

Daily Digest Market Movers: US Dollar holds its ground as markets digest low tier data ahead of Fed’s decision

According to the US Bureau of Labor Statistics, JOLTs Job Openings for December came in at 9.026M, slightly above the consensus of 8.75M but below November's 8.925M.
The Conference Board reported a dip in its Consumer Confidence Index, with a January standing of 114.8 compared to 115 projected and the previous 108.
The S&P Case-Shiller Home Price for November fell -0.2% MoM against a 0.1% gain in the prior period. On a yearly basis, it had an increase of 5.4%, lower than the expected 5.8% but up from previous 4.9%.
Market's perspective on the Federal Reserve's next move, as gauged by the CME FedWatch Tool, suggest that investors are confident that the bank won’t change its policy on Wednesday. As for now, markets are seeing the easing cycle starting in May.

Technical Analysis: DXY bulls defend the 200-day SMA, further downside on the horizon if lost

On the daily chart, the Relative Strength Index (RSI) portrays a slight positive slope within positive territory, indicating steady buying momentum. This, in combination with the green bars represented by the Moving Average Convergence Divergence (MACD), furthers bullish sentiment and suggests an underlying upward price trajectory.

Meanwhile, the placement of the index with respect to the Simple Moving Averages (SMAs) provides additional insights. Remaining above the 20-day SMA confirms a short-term bullish bias. The DXY’s position below the 100-day SMA could introduce occasional pullbacks, yet sustaining above the 200-day SMA demonstrates that the buying pressure overweighs the selling momentum on larger time frames.

Support Levels: 103.40 (200-day SMA),103.30, 103.00.
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.

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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