- Despite market concerns, the US economy continues to grow above trend.
- The market anticipates 100 bps of Fed easing by year's end.
- Wednesday won’t have any economic highlights, market sentiment to dictate the pace.
The US Dollar, measured by the DXY index, remained well-supported during Wednesday's session, driven primarily by selling pressure on the Japanese Yen following a cautious outlook by the Bank of Japan. The USD/JPY pair saw a significant 2% surge throughout the day, contributing to the DXY index's hold above the 103.00 point. While there won’t be any economic data highlights on Wednesday, caution and risk perception might dictate the pace of the USD.
While markets contended with potential implications of further easing from the Fed, the US economy continues to perform solidly. Growth remains above trend, suggesting a market caught up in overly aggressive easing forecasts.
Daily digest market movers: US economic performance calls into question market's aggressive easing bets
- The market remains mispriced on the extent of the Fed's easing, still fully pricing in 100 bps by year-end, a decrease from Monday's 125 bps expectations.
- The market now anticipates a near 80% likelihood of a 50 bps reduction in September, down from Monday's 90%
- Overall easing over the next 12 months is now expected between 175 to 200 bps, a reduction from the over 200 bps predicted on Monday
On the other hand, a severe US economic recession would need to materialize for the current easing path to remain feasible. Until more data is available, it remains challenging to counteract the prevailing dovish market narrative.
DXY technical outlook: Indications of improvement seen, bears take a breather
The DXY index's technical outlook is improving. Both the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are currently in the red, with the RSI below the 50-point level but pointing upwards, and the MACD continuing to print lower red bars.
However, a firmly bearish outlook is confirmed by the index remaining below the 20, 100 and 200-day Simple Moving Averages (SMAs).
With this in mind, current support stands at 103.00, 102.50 and 102.20 with resistance noted at 103.50 and 104.00.
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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