US Dollar jumps as Michigan numbers confirm Powell is right to be hawkish

The Greenback jumps higher as inflation is expected to pick up.
Traders got caught by surprise as Powell delivered surprisingly hawkish remarks.
The US Dollar Index nearly broke above 106.00.

The US Dollar (USD) trades in the green after an uptick in inflation expectation and after surging overnight due to Federal Reserve Chairman Jerome Powell’s hawkish comments, which caught traders by surprise. The Fed’s Chairman signaled that policymakers are not scared of increasing interest rates further if needed, which goes against market consensus that the Fed is done hiking and cuts will be soon at hand. The surprise was even more bigger as earlier Atlanta Fed President Raphael Bostic and Richmond Fed President Thomas Barkin delivered very dovish comments.

On the economic data front, traders will now start to look forward to inflation numbers next week. Markets will be looking for clues if price pressure is indeed picking up again as both Powell and Michigan expectations have told markets they are. This could mean that some more US Dollar strenght will come into the US Dollar Index (DXY) into next week.

Daily digest: US Dollar back in the green

These are the main takeaways from US Fed Chairman Powell speech on Thursday evening:
1. “We are not confident that we have achieved the right stance for inflation.”
2. “Continued inflation progress is not assured.”
3. “[The] Fed will not hesitate to tighten more if appropriate. We are not confident that we have done enough to achieve the stance to hit 2% inflation.”
The only important data point on Friday will be the preliminary report from the University of Michigan for November:
1. The Consumer Sentiment Index dropped substantially from 63.8 to 60.4
2. The 5-year Consumer Inflation Expectation rose from 3.0% to 3.2%
Equities are not digesting Powell's speech well: The Chinese Hang Seng is down over 1% and European equities are in the red over 0.50%. US equity futures are trading marginally in the green in pre-market opening.
The CME Group’s FedWatch Tool shows that markets are pricing in a 90.7% chance that the Federal Reserve will keep interest rates unchanged at its meeting in December.
The benchmark 10-year US Treasury yield trades at 4.58%, after Powell reiterated that more hikes might be needed to battle inflation.

US Dollar Index technical analysis: US Dollar to lock in weekly gain

The US Dollar got a boost from the hawkish comments from Fed’s Powell. With the Michigan expectations now soaring as well to 3.2% inflation, the rate differential story comes back into play. This means that the US Dollar would gain against most major peers as the elevated level in the US is stronger than the rates in Europe or other developed countries.

The DXY was looking for support near 105.00, and has been able to bounce ahead of it earlier this week. Any shock events in global markets could spark a sudden turnaround and favour safe-haven flows into the US Dollar. A rebound first to 105.85 would make sense, a pivotal level from March 2023. A break above could mean a revisit to near 107.00 and recent peaks printed there.

On the downside, 105.10 is still acting as a line in the sand. Once the DXY slides back below that, a big air pocket is opening up with only 104.00 as the first big level, where the 100-day Simple Moving Average (SMA) can bring some support. Just beneath that, near 103.50, the 200-day SMA should provide similar underpinning.

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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