US Dollar corrects with post-election rally stalling and Fed taking over

The US Dollar pares large gains on Thursday with markets focusing on the Fed rate decision.
Although Fed Chairman Powell is expected not to answer questions on politics, markets will be eager to see his reaction on the upcoming Trump presidency.
The US Dollar index hits mid 104-territory and falls further, unable to hold Wednesday's gains.

The US Dollar (USD) is facing more selling pressure as the fade becomes larger with profit-taking pressure persisting on Thursday after the Greenback had its best performance in years in reaction to Donald Trump winning the US presidential election. Traders’ attention shifts now to the Federal Reserve (Fed), which is set to cut interest rates by 25 basis points (bps) this Thursday. With the rate decision fully priced in, the focus will be on Fed Chairman Jerome Powell, specifically on the inflation and rate outlook for December and beyond in light of the US presidential election outcome.

The US economic calendar is picking up in weight, with the weekly Jobless Claims set to be released. The quarterly Nonfarm Productivity and Unit Labor Costs will add some weight to the price reaction as well. Right at the end of the trading day, the Fed will release its rate decision, followed by Fed Chairman Powell’s press conference shortly thereafter.

Daily digest market movers: Here comes Jobless Claims

The US economic calendar kicks off at 13:30 GMT with a string of data:
- The Initial Jobless Claims for the week ending on November 1 are expected to come in at 221,000, higher than the 216,000 of the previous week.
- The preliminary reading for the third quarter Nonfarm Productivity is expected to come in at 2.3% compared to 2.5% in the previous quarter.
- The preliminary third quarter Unit Labor Cost is expected to tick up to 0.5%, from 0.4% previously.
At 19:00 GMT, the Fed is publishing its interest rate decision. Expectations are for a rate cut to 4.75% from 5%.
At 19:30 GMT, Fed Chairman Jerome Powell will take the stage to deliver a speech and comments on the recent rate decision. During the press conference, there are bound to be questions on the Fed’s stance in light of the recent Trump presidential election win.
The CME FedWatch Tool shows a 70.8% chance that the interest rate will be 50 basis points (bps) lower than the current level in the Federal Reserve’s December 18 meeting. Assuming a 25 bps cut in November, a new 25 bps cut could be expected in December. A smaller 28.4% chance is present for the interest rate to be 25 bps lower than the current level in December, implying no cut that month after trimming rates in November..
The US 10-year benchmark rate trades at 4.42%, settling down a bit after hitting 4.47% earlier.

US Dollar Index Technical Analysis: Fed takes over

The US Dollar Index (DXY) has played its hand and has made markets clear what the famous Trump trade will mean for markets when US President-elect Donald Trump takes office on January 20, 2025. While the Fed is set to continue its interest rate-cut cycle, a tug-of-war might occur. Traders could expect the second phase of the Trump trade in January with a stronger Greenback, while the Fed rate-cutting cycle suggests a softer Greenback. Refrain from expecting this to be a straight line-up for the DXY and rather expect to see substantial easing first before Trump takes office.

The first upper level is 105.53 (April 11 high), a very firm cap resistance, with 105.89 (May 2 high) just above. Once that is broken, 106.52, the high of April and a double top, will be the last level standing before starting to talk about 107.00.

On the downside, last week’s peak at 104.63 looks to be the first pivotal support nearby. Should the fade become bigger, the round level of 104.00 and the 200-day Simple Moving Average (SMA) at 103.85 should refrain from sending the DXY any lower.

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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