US Dollar trades soft amid risk-on flows, Fed doves gain relevance

The US Dollar traded soft against its rivals on Monday after gaining more than 1% at the end of last week.
The US will report September’s Retail Sales figures and the Fed’s Beige book.
Wall St indexes are up by more than 1%, adding pressure on the USD.
Thomas Harker from the Fed reiterated that the Fed is likely done with hikes.

The US Dollar (USD) measured by the US Dollar DXY Index trades with nearly 0.40% losses on Monday as investors seem to be taking profits from last week’s gains, which saw the green currency gaining over 1% against its rivals. The US reported low-tier economic activity figures that failed to significantly impact the USD, with the Empire State Manufacturing Survey conducted by the Federal Reserve Bank of New York declining but lower than expected. Investor’s focus is on Tuesday’s Retail Sales figures from the US and the Federal Reserve (Fed) Beige book report. A positive market environment also contributes to the DXY's decline, with the major Wall Street indexes seeing sharp increases of more than 1%.

In the United States, economic activity shows signs of resilience, and inflation figures revealed that the Consumer Price Index (CPI) slightly accelerated in September. This outlook favours the case of the Fed hiking at least one more time in this year, which is reflected by rising US Treasury yields. Investors seem to be gearing up for an additional 25 basis point hike by year's end. That being said, last week, several Fed officials hinted that the bank wouldn't hike for the rest of 2023 and on Monday, Thomas Harker reiterated that rate hikes are "likely" done for this cycle, strengthening the dovish rhetoric, which could add further pressure on the USD.

Daily Digest Market Movers: US Dollar consolidates last week’s gains, focus on economic activity reports

The US Dollar DXY retreated to 106.20 after rising to 106.80 last Friday and seems to be en route towards the 20-day Simple Moving Average (SMA) at 106.15.
The NY Empire State Manufacturing Survey from October came in at -4.6 vs the -7 expected.
US retail Sales are expected to come in at 0.3% MoM, decelerating from 0.6%.
US yields continue rising, with the 2, 5 and 10-year rates rising to 5.08% and 4.70%, respectively, with more than 0.50% gains.
Evidence of strong economic activity may reignite bullish momentum for the USD following last week’s inflation figures, which saw the Consumer and Producer Price Indexes accelerating in September.
The US reported that the Consumer Price Index (CPI) from the US came in at 3.7% YoY, which was higher than the market consensus of 3.6% and matched the previous monthly figure of 3.7% YoY. On the other hand, the Core measure came in at 4.1% YoY, matching the expectations and decelerating from the previous 4.3% YoY.
The September US Producer Price Index (PPI) was reported to have risen to 2.2% on Wednesday, higher than the expected 1.6%.

Technical analysis: US Dollar Index’s bull must defend the 20-day SMA to continue rising

The US Dollar Index DXY is showing a neutral to bullish outlook for the short term, and the buyers are building strong support around the 20-day Simple Moving Average (SMA) at 106.15. As long as the index holds above this level, the positive outlook for the short term is intact.

Supports: 106.15 (20-day SMA), 105.80, 105.50.
Resistances: 106.50, 107.00, 107.30.

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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