- US Dollar gets a boost from an increase in US Treasury yields on Thursday.
- Markets still show signs of caution as Fed officials express a conservative stance on embracing easing cycles.
- The mixed US economic outlook tempers upside in the Greenback.
On Thursday, the US Dollar, as gauged by the Dollar Index (DXY), saw significant strength on the back of rising US Treasury yields. This follows a dip midweek as market participants analyzed several recently released mid-tier data releases, including soft Retail Sales figures from May. On Thursday, the USD shrugged off weak labor and housing data.
In regard to the US economic outlook, while there are signs of disinflation, Federal Reserve (Fed) officials' measured comments are keeping the market's expectations in check. If the mixed signals from the economy persist, it could potentially hinder further USD strength.
Daily digest market movers: US Dollar gains despite weak data
- Building Permits declined from 1.44 million to 1.386 million, a dip below predictions.
- In addition, Housing Starts also decreased, moving from 1.352 million to 1.277 million, missing optimistic estimates.
- Initial Jobless Claims recorded a slight drop, trending from a revised 243K to 238K. Continuing Jobless Claims saw an increase from 1.813 million to 1.828 million.
- Philadelphia Fed Manufacturing Survey for June disappointed, posting a 1.3 instead of the projected 5, down from the previous 4.5.
- Minneapolis Fed President Neel Kashkari noted that returning inflation to the 2% target could take one to two years since current wage growth still outpaces the desired rate.
- Chances of an interest rate cut remain at about 67% for the upcoming Fed meeting on September 18, according to the CME Group's FedWatch Tool.
- US Treasury yields saw a considerable rise, with gains exceeding 1%. The 2-year, 5-year and 10-year rates stood at 4.74%, 4.29%, and 4.27%, respectively.
DXY technical analysis: Bullish sentiment gains traction, must recover 105.50
Technical indicators for Thursday's session showed renewed bullish momentum bolstered by increased US Treasury yields. The Relative Strength Index (RSI) held above 50, with a prevailing green histogram in the Moving Average Convergence Divergence (MACD), indicating sustained bullish sentiment.
Additionally, the DXY Index maintains above its 20-day, 100-day and 200-day Simple Moving Averages (SMA). This, combined with the rising indicators, suggests the potential for additional gains in the US Dollar. Yet, given the mixed economic outlook, investors should remain attentive to changes in the market landscape.
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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