US Dollar bulls struggle to gain further ground, losses limited by resilient economy
|- The US Dollar Index showed some gains on Thursday, jumping to 104.10 and then stabilized at 104.00.
- February’s S&P PMIs came in mixed, while weekly Jobless Claims came in better than expected.
- Strong labor market figures may push the Fed to remain hawkish.
The US Dollar Index (DXY) saw a slight upswing to 104.10 in Thursday’s session following the release of mixed economic activity data and positive labor market figures but during the American session, it gave up gains at retreated to 104.00.
Meanwhile, the US Federal Reserve continues to adopt a firm approach, showing little interest in reducing interest rates soon and emphasizing the importance of maintaining rates at levels that restrict economic overheating. Market sentiments are increasingly in agreement with this perspective, solidifying the anticipation that any relaxation in monetary policy will be postponed, which may limit the US Dollar’s losses.
Daily digest market movers: The US Dollar holds mild gains as markets digest US data
- The S&P Global Composite PMI in the US decreased to 51.4 in February from 52 in January, indicating a slower expansion of business activity in the private sector.
- S&P Global Manufacturing PMI saw an increase to 51.5 from 50.7, signaling a slight improvement in manufacturing sector growth.
- The Services PMI from S&P Global dropped to 51.3 from 52.5, reflecting a reduction in the pace of expansion within the services sector.
- Initial Jobless Claims for the week ending February 16 came in at 201K, lower than the 218K consensus.
- Market expectation for the next Fed meeting in March suggests that markets are pricing in a hold, while the odds of a cut also remain low for the May meeting.
- Markets are now pushing the start of interest rate easing to June.
Technical analysis: DXY bulls struggle to gain further ground and remain below the 100-day SMA
The indicators on the DXY daily chart reflect a mixed picture. The Relative Strength Index (RSI) exhibits a flat slope yet remains in positive territory This suggests that although the buying momentum has slowed down recently, the overall uptrend has not been completely undermined.
Concurrently, the Moving Average Convergence Divergence (MACD) displays red bars, which is another indication of rising selling momentum. This denotes a possible shift toward a sideways trading phase or even a slight bearish reversal.
In the larger context, the DXY Index is trading above the 20-day Simple Moving Average (SMA) and 200-day SMA but below the 100-day SMA. This highlights that the bulls maintain some dominance, defying recent bearish pressure. However, the Dollar Index’s position under the 100-day SMA signals a potential short-term trepidation among buyers.
Despite the bulls struggling to gain ground, the overall trend appears to still be in favor of buyers, albeit that increasing bearish signals should not be ignored. Hence, the short-term technical outlook seems to be cautiously bullish, with potential periods of consolidation or minor corrections on the horizon.
US 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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