US Dollar closes the week strong despite weak UoM figures


  • DXY rally extends into Friday, hitting its highest level since early May.
  • Consumer Confidence from the UoM figures come in below expectations, dampening the market mood, but DXY maintains its daily gains.
  • US Treasury yields remain low, signaling a risk-off market environment.

On Friday, the US Dollar Index (DXY) shrugged off weak data releases and continued its positive traction. The Index now hovers around its highest level since early May near 105.80 and then retreated to 105.60 but held daily gains.

The economic outlook for the US remains a mixed bag. The Federal Reserve (Fed) continues to hold its economic activity revisions steady but revised its Personal Consumption Expenditures (PCE) estimates higher. Additionally, preliminary analysis suggests softening inflation but a resilient labor market, pushing the Fed to anticipate fewer rate cuts. On Friday,

Consumer Confidence data from the University of Michigan showed poor results that reached a seven-month low. This made the USD trim part of its daily gains as much of the US economy revolves around consumer spending.

Daily digest market movers: DXY holds the line after UoM data, markets adjust to Fed’s decision

  • On Wednesday, FOMC dot plot update shows median expectancy of only one rate cut for 2024.
  • Markets were previously anticipating between one or two rate cuts in 2024, but this altered after the Fed announced its decision.
  • University of Michigan Consumer Confidence Index for the US has fallen from 69.1 in May to 65.6 in early June, which is below the market's expectation of 72. This decline also reflected in the Current Conditions Index, falling from 69.6 to 62.5.
  • Consumer expectation index also fell slightly from 68.8 to 67.6. The five-year inflation outlook rose from 3% to 3.1%.

DXY technical analysis: Bulls continue to dominate, holding above SMAs

As of Friday’s session, the technical indicators maintain their positive outlook. The Relative Strength Index (RSI) remains above 50 and the Moving Average Convergence Divergence (MACD) continues to reflect green signaling bars. Furthermore, the index remains standing above its 20, 100 and 200-day Simple Moving Average (SMA). The combination of these factors strengthens the bullish outlook 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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