US Dollar steady after Fed turns hawkish for 2025 and Manufacturing data for December deteriorates

The US Dollar retreats from its two-year high after the Fed signaled fewer interest-rate cuts ahead.
The FOMC members have concerns on inflation throughout 2025 and factor in a Trump-effect.
The US Dollar Index (DXY) is trading at 108.00, finding support at that level.

The US Dollar (USD) faces some pressure from profit taking on Thursday, with the DXY Index hovering around 108.00 all day now, after its sizable upward move on Wednesday on the back of the Federal Reserve (Fed) interest-rate decision. The rate cut by 25 basis points, lowering the policy rate to the 4.50%-4.75% range, was already long priced in. Markets got spooked by the retreat in the number of projected rate cuts for 2025 from four to only two.

It appears that members of the Federal Open Market Committee (FOMC) are concerned about the continuation of the disinflationary path. The recent commitments from President-elect Donald Trump are clearly alive in the minds of the Federal Reserve members. Prospects of fewer rate cuts in 2025 widen the rate differential even more between the US and other countries in favor of a stronger US Dollar.

The US economic calendar is further winding down towards the Christmas lull. The third reading of the US Gross Domestic Product for the third quarter did not bring much changes. Rather the Philadelphia Fed Manufacturing Survey for December saw a big drop and fell deeper into contraction.

Daily digest market movers: Philadelphia Fed Manufacturing sinking

A government shutdown is looming in the US. Both the House of Representatives and the Senate are rushing to pass a stopgap bill. Meanwhile, President-elect Donald Trump already said he opposed the bill, according to Fox News.
A chunky batch of data got released this Thursday:
- Weekly Jobless Claims:
  - Initial Jobless Claimscame in at 220,000 for the week ending December 6 from 242,000 the week before and below the 230,000 estimate.
- The third reading for the Gross Domestic Product for the third quarter:.
  - The annualized GDP grew by 3.1%, beating the 2.8% estimate and previous reading, headline Personal Consumption Expenditures (PCE) Price Index unchanged at 1.5%, core PCE stable at 2.1%, and GDP Price index also unchanged at 1.9%.
- The Philadelphia Fed Manufacturing Survey for December came in as a big miss on estimates. A firm declineto -16.4, missing the 3 estimate and against the previous -5.5.
At 16:00 GMT, the Kansas Fed Manufacturing Activity for December will be issued. The previous reading showed a contraction at -4.
Equities in Europe are down over more than 1% for this Thurdsay while US Futures are gearing up for a positive open and are shrugging off the Fed's hawkish message.
The CME FedWatch Tool for the first Fed meeting of 2025 on January 29 sees a 91.4% chance for a stable policy rate against a small 8.6% chance for a 25 basis points rate cut.
The US 10-year benchmark rate trades at 4.54%, a fresh seven-month high.

US Dollar Index Technical Analysis: Looking for support

The US Dollar Index (DXY) appears to have played its last hand for 2024. After the Fed rate decision and the release of the dot plot, the DXY increased to a fresh two-year high at 108.28 to later suffer from profit taking. The expectation is that the DXY might correct further until 107.35 or even 106.52 before finding solid support.

A fresh set of levels need to be defined to the upside. The first up is 109.29, which was the peak of July 14 2022 and has a good track record as a pivotal level. Once that level is surpassed, the 110.00 round level comes into play.

Under the pressure of some profit taking, the DXY could now look for some solid support. The first downside barrier comes in at 107.35, which has now turned from resistance into support. The second level that might be able to halt any selling pressure comes in at 106.52. From there, even 105.53 could come under consideration while the 55-day Simple Moving Average (SMA) at 105.23 is making its way up to that level.

US Dollar Index: Daily Chart

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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