US Dollar saw volatility on Wednesday as markets digest Fed's decision and Powell's words
|- US Dollar exhibited strength after market participants took in the Fed's decision.
- Despite showing signs of disinflation, the US economy remains resilient, which keeps the Fed data-dependent.
- The odds of a cut in September remain elevated after the decision and Powell's presser.
The US Dollar, tracked by the DXY index, lost ground on Wednesday before the Federal Reserve’s meeting but managed to clear losses after the announcement. Following Powell's presser where he opened the door for a September cut, the USD resumed its downside as markets got clear clues on when the bank will start cutting.
Signs of disinflation are beginning to permeate the US economic landscape, affirming the market's belief in a forthcoming rate cut in September. However, the larger economy continues to depict strength, as underscored by last week's data surprises like the Q2 Gross Domestic Product (GDP) and July S&P Global PMIs.
Daily digest market movers: USD resumes its losses after Powell’s presser
- The Federal Reserve has decided to hold the target range for the federal funds rate at 5.25% to 5.5%.
- The statement mentioned that economic activity continues to expand albeit with moderated job gains and a slight increase in unemployment.
- The bank stated that inflation has eased, but that it remains elevated.
- During the presser, Jerome Powell hinted at the possibility of an interest rate cut in September, depending on upcoming economic data such as inflation and jobs reports.
- He acknowledged that some members of the Federal Reserve even suggested cutting rates immediately.
- This statement led to positive reactions in the markets, with gold and stocks rising and the US Dollar weakening.
- The odds of a September cut remain high, but they will depend on incoming data. Hence Weekly Jobless Claims and Nonfarm Payrolls at the end of the week will be closely relied on for direction.
DXY technical outlook: Neutral to bearish positioning forms as index drops below key SMAs
Despite a promising weekly start, the DXY index is experiencing a downturn, falling below both the 20-day and 200-day Simple Moving Averages (SMA). These two indicators seem to be converging toward a bearish crossover at around 104.00, which could add more selling pressure.
The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), although not fully recovered, demonstrate a gradual return to neutral territory, but if they jump to positive terrain, the DXY is poised for further downside. The index continues to find support at the 104.15 and 104.00 levels, while resistance is observed at the 104.50 and 105.00 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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