US Dollar rebounds as markets await FOMC directions
|- US Dollar displays strength ahead of Wednesday Fed decision and labor market data.
- Fed is expected to remain data-dependant but leave the door open for September cut.
- Markets are extremely confident about a September cut of 25 bps.
The US Dollar represented by the DXY index charged forward on Monday despite looming uncertainties. The market remains on edge with September's potential rate cut by the Federal Reserve (Fed) somewhat uncertain, but optimism surrounding the US economy's strength is tempering anxieties. The Fed decision on Wednesday and labor market data will guide markets this week.
There is growing evidence of disinflation in the current US economic landscape, which solidifies the market's belief in a prospective rate cut in September. However, the broader economy demonstrates strength, as is made evident by recent data surprises like the Q2 Gross Domestic Product (GDP) and July S&P Global PMIs, which might give the Fed reasons not to rush a rate cut.
Daily digest market movers: US Dollar firms ahead of July labor data and FOMC meeting
- Two-day FOMC meeting concludes on Wednesday with a plausible commitment to unchanged rates
- Market players recognize the solid performance of the US economy warrants no immediate action by the Fed, but the September FOMC meeting is predicted to bring a potential rate cut into the spotlight
- Chair Powell's press conference has the potential to sway markets, but his precedent of focusing on labor market uncertainty is likely to continue
- In that sense, labor market data to be released throughout the week will guide market bets regarding the September decision
DXY technical outlook: Bearish signs stall as index inches toward 20-day SMA
Pushing past initial signs of struggle, the DXY Index is now rebounding from 200-day Simple Moving Average (SMA). The 20-day SMA is now viewed as the next target. However, key indicators such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), though still in the red, are inching toward positive terrain.
Continued support is noted at 104.30 and 104.15 levels, while resistances are observed at 104.60 and 104.80 levels.
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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