- US Dollar saw severe selling pressure after soft ADP figures from June.
- Markets boosted their bets for September Fed rate cut.
- FOMC minutes from the June meeting saw members acknowledging a 'cool down' of the economy.
On Wednesday, the US Dollar, represented by the Dollar Index (DXY), declined to its lowest level since June 18 at around 105.20 following the release of robust ADP labor market data. In addition, the meeting minutes from the June Federal Open Market Committee (FOMC) showed that members acknowledged that price pressures where easing, as well as the overall economy.
Signs of disinflation and a cooling labor market are becoming evident in the US economy, thereby fuelling belief in a rate cut possibly occurring in September. Federal Reserve (Fed) officials, however, exhibit restraint and maintain their data-dependent stance.
Daily digest market movers: US Dollar loses ground following robust ADP data, FOMC Minutes
- Private sector employment in the US reported by ADP reflected a decline with a rise of 150K in June, contrasted against a revised number of 160K expected.
- Later this week, the highlight resides with the June Nonfarm Payrolls data due on Friday. Bloomberg consensus predicts a drop to 190k from 272k in May, yet whisper numbers currently point to 198k.
- In the Minutes from the two-day session on June 11-12, Federal Reserve officials recognized signs of a slowing US economy.
- Participants also observed that "price pressures were easing." However, they didn't embrace rate cuts and recommended maintaining a cautious approach and refraining from committing to cutting until further assessment.
- Market perceives 70% likelihood of September rate cut.
DXY technical outlook: Bulls give up and lose 20-day SMA
On Wednesday, the outlook for the DXY turned negative in the short term with both the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) now on negative terrain.
The highlight is that the bulls lost their position above the 20-day Simple Moving Averages (SMAs). The market should monitor potential fallbacks toward the 105.00 and 104.50 zones. On the upside, the former support of the 20-day SMA at 105.40 is now a resistance line.
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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