US Dollar weakens on quiet Wednesday, eyes set on CPI
- DXY Index registers minor losses, trading around 102.40.
- Investors are on standby awaiting CPI figures to be released on Thursday.
- Lower US yields limit the US Dollar advance.
The US Dollar (USD) observed modest losses on Wednesday, trailing at 102.4 in the US Dollar Index, as market participants stick to the sidelines awaiting drivers. The trading floors were relatively quiet with no significant reports fuelling reactions during the session. The focus is set on the release of the US Consumer Price Index (CPI) from December, due on Thursday.
For now, markets are betting on five rate cuts in 2024, largely dismissing the Federal Reserve (Fed) forecast of only 75 bps of easing. Strong labor market data from the US economy was largely offset by a weak US ISM PMI print, so December’s CPI reading will play a big role in shaping expectations of the central bank’s easing calendar.
Daily digest market movers: US Dollar edges lower on quiet Tuesday, Fed Williams will be on the wires
- The US economy demonstrates continued expansion above trend with Q4 and possibly Q1 growth, bolstered by loose financial conditions.
- The US Dollar remains vulnerable as market easing expectations for the Federal Reserve remain high yet unmet. Fed’s Williams will be on the wires by the end of the American session, which may move markets.
- For Thursday, the December Consumer Price Index is projected to come in at 3.2% YoY, above the previous 3.1%. The core annual reading, however, is expected at 3.8%, easing from 4% in November.
- US bond yields, specifically for the 2, 5 and 10-year bonds, are on a downward trajectory. The yields are seen at 4.35%, 3.96% and 4.02%, which should limit upside for the USD.
- Market anticipations gauged through the CME FedWatch Tool suggest a hold on rates in the upcoming January meeting is priced in. Cuts in interest rates are, however, expected around March and May 2024.
Technical Analysis: DXY bulls are undecided as sellers sit just around the corner
The indicators on the daily chart reflect a decrease in buying momentum and increase in selling pressure. The Relative Strength Index (RSI), which is on a negative slope and in negative territory, suggests that bears are around the corner.
In addition, a decreasing histogram of green bars in the Moving Average Convergence Divergence (MACD) indicator confirms the growing bearish sentiment, indicative of a decrease in bullish momentum. Despite bulls taking a breather, they still are struggling to make a decisive upward move.
This lack of bullish momentum is also confirmed by the position of the index in relation to the Simple Moving Averages (SMAs). While it remains above the 20-day SMA, it is under the broader 100 and 200-day SMAs, suggesting bears are maintaining a bullish grip on the larger time horizon.
Support levels: 102.30, 102.00 (20-day SMA), 101.80.
Resistance levels: 102.70, 102.90, 103.00.
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.
