- USD/CNH extends upside near 7.2935 on Monday.
- China’s PBoC cut its main benchmark lending rate for the first time since August 2023 in a bid to shore up the economy.
- The rising bets on the Fed rate cut this year might weigh on the Greenback and cap the pair’s upside.
The USD/CNH pair trades in positive territory for the third consecutive day around 7.2935 during the Asian trading hours on Monday. The uptick of the pair is bolstered by a surprise rate cut by the People's Bank of China (PBoC). The release
Early Monday, the Chinese central bank announced to cut the one-year Loan Prime Rate (LPR), benchmarks for the loans banks make to their customers, by 10 basis points (bps) from 3.45% to 3.35% and cut the five-year LPR from 3.95% to 3.85%. Additionally, the PBoC cut its main short-term policy rate for the first time since August 2023. The 7-day reverse repo was cut from 1.8% to 1.7%.
On the other hand, the prospect of a forthcoming Federal Reserve (Fed) rate cut might undermine the US Dollar (USD) and cap the upside for the pair. New York Federal Reserve President John Williams said on Friday that an interest rate cut could be warranted in the coming months, but not at its July policy meeting.
Meanwhile, Fed Governor Christopher Waller stated that inflation will continue to moderate towards the Fed's 2% target in the months ahead, adding that the time to lower the policy rate is drawing closer. According to the CME FedWatch Tool, investors are now pricing in the odds of a move at its July meeting less than 5%, and pricing in a nearly full rate cut is firmly expected in September.
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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