US Dollar climbs higher, favoured by strong US data
- US Dollar maintains momentum ahead of Fed decision and labor market update.
- US JOLTs and CB Consumer Confidence figures exceed expectations.
- Fed is expected to stay data-dependent and keep possibilities open for a September cut.
The US Dollar, measured by the DXY index, continues its upward trend. Despite uncertainties hanging in the air over the Federal Reserve’s (Fed) next steps, optimism about the robustness of the US economy is helping the Greenback to gain ground. The forthcoming decision from the Fed due on Wednesday alongside the labor market data expected this week will be pivotal indicators for the market.
The US is starting to show signs of disinflation that strengthen the market's confidence in a possible rate cut in September. However, the overall economy remains resilient as evidenced by the incoming data, which might delay the pivot to rate cuts.
Daily digest market movers: US Dollar firms up following upbeat labor and consumer confidence data.
- US consumer sentiment improved slightly in July with the Conference Board's Consumer Confidence Index rising to 100.3 from a downwardly revised 97.8 in June.
- Present Situation Index had a slight decline to 133.6 from 135.5, as Expectations Index climbed to 78.2 from 72.8.
- US Bureau of Labor Statistics (BLS) reported in its Job Openings and Labor Turnover Survey (JOLTS) on Tuesday that on the last business day of June there were 8.184 million job openings.
- That figure exceeded the market expectation of 8.03 million and follows the 8.23 million openings (revised from 8.14 million) reported in May.
- Week’s highlight will be Federal Open Market Committee (FOMC) meeting, which ends on Wednesday with a widely expected hold for interest rates.
- US economy’s strong performance negates immediate need for Fed to lower interest rates, but investors expected the Fed to keep possibilities open for a rate cut at the September FOMC meeting.
DXY technical outlook: Improving signs are observed as the index rebounds toward 20-day SMA
The DXY index, after rebounding from the 200-day SMA, has now successfully climbed above the 20-day Simple Moving Average (SMA). The key signals such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), although still remaining on the negative side, are inching toward the positive side, brightening the outlook.
There is noticeable support at 104.50, one more than Monday's 104.30 level, and resistance is eyed at 104.70 and higher around 105.00.
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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