US Dollar dips slightly, yet caps off the week with gains

  • The DXY Index trades just below the 200-day SMA as bulls are struggling to hold their ground.
  • Existing Home Sales from December were weak, while the University of Michigan Consumer Sentiment arrived better than expected.
  • Dovish bets on the Fed remain high.

The US Dollar (USD) is seen with mild losses by the end of the week and currently tallies a 0.90% weekly gain. Strong University of Michigan (UoM) data is keeping the USD afloat, but steady dovish bets on the Federal Reserve (Fed) limit the upward potential.

The US economy appears overheated, tempering the market's dovish expectations, although the chances of interest rate cuts in March and May lingers at around 50%. Thus, the US dollar remains in fluctuating currents, affected by both resilient economic performance and dovish bets on the Fed's likely moves.

Daily digest market movers: US Dollar stands neutral as markets asses UoM and Housing data

  • The Michigan Consumer Expectations for January reported by the University of Michigan (UoM)  came in at 75.9, an increase from the December figure of 67.4.
  • The five-year Inflation Expectations saw a slight decrease of 2.8% compared to the previous month's 2.9%.
  • Similarly, the UoM’s Inflation Expectations for January were down to 2.9% from the previous 3.1%.
  • The Current Conditions for January increased to 83.3 compared to December's 73.3.
  • December’s Existing Home Sales from the National Association of Realtors (NAR) turned out lower than expected at 3.78M against the anticipated 3.82M.
  • The yields for US bonds are still advancing with the 2-year yield at 4.41%, the 5-year yield at 4.09%, and the 10-year yield at 4.17%. All three are at their highest level since mid-December.
  • As per the CME FedWatch Tool, the odds of cuts for March and May eased, but they remain high at 55% and 45%, respectively.

Technical Analysis: DXY Index bulls shows resilience, must recover the 200-day average

The Relative Strength Index (RSI) showcases an upward slope, residing well within positive territory, which generally denotes bullish strength. This is concurrent with the Moving Average Convergence Divergence (MACD), which, propelled by the rising green bars, indicates strong buying momentum. However, those indicators are starting to flatten as the index tallied a five-day winning streak.

Reflecting upon the Simple Moving Averages (SMAs), the index holds a position above the 20-day average, denoting an undercurrent of bullish dominance in the immediate short term. However, if the bulls fail to regain the 200-day SMA, more downside may be on the horizon.

Support levels: 103.20, 103.00, 102.80.
Resistance levels 103.40 (200-day SMA), 103.60, 103.80.

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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