US Dollar recovers terrain, eyes on PCE
|- US Dollar opens Tuesday with robust rebound.
- Fed officials maintain a cautious approach given mixed economic indicators.
- May’s PCE is the week’s highlight on Friday.
On Tuesday, the US Dollar, as portrayed by the Dollar Index (DXY), rose to 105.70 after opening the week on a soft note. A recovery in US yields appeared to overlook a slight dip in Consumer Sentiment data reported during the session.
From an economic perspective in the US, the picture continues to be mixed. A few signals of disinflation are noticeable, while most Federal Reserve (Fed) officials maintain a cautious approach.
Daily digest market movers: DXY shrugs off weak sentiment data on the back of hawkish bets
- On Tuesday, investors' attention was drawn by the Conference Board's Consumer Confidence Index. The figure slightly slipped to 100.4 from a revised 101.3 in May, indicating a somewhat tepid pace of consumer spending activity.
- Moving to Thursday, the Gross Domestic Product (GDP) revisions for the year are expected to remain at 1.3%.
- Friday will be a significant event as the May Personal Consumption Expenditures (PCE), a gauge of inflation favored by the Fed, is scheduled to be released.
- Both headline and core PCE are projected to ease to 2.6% YoY, down from 2.7% and 2.8%, respectively, in April.
- Expectations are high for a potential Fed rate cut in November, with a 70% probability of a cut happening as early as September.
- PCE data will play a crucial role in influencing market predictions.
Daily digest market movers: DXY shrugs off weak sentiment data on the back of hawkish bets
The technical outlook continues on a positive note, with indicators comfortably in the green. The Relative Strength Index (RSI) remains above 50 and trends upwards, while the Moving Average Convergence Divergence (MACD) is building green bars, suggesting a building of strength among bulls.
In addition, the DXY Index sustains its position above the 20, 100 and 200-day Simple Moving Averages (SMAs), which confirms an overall positive outlook.
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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