US Dollar weak after soft CPI figures from July
- USD marks a slight decline as lower US inflation further dulls its attractiveness.
- Softer but in-line CPI figures give markets reason to feed on dovish narrative.
- Markets still anticipate the first rate cut in September.
The US Dollar (USD), gauged by the US Dollar Index (DXY), showed a slight downtrend below the 103.00 threshold during Wednesday's trading session. This decrease follows the confirmation of cooler-than-expected inflation in the US, which somewhat overshadowed the stable outlook of the country's labor market.
While the market expectations regarding the upcoming decisions on monetary policy didn't change substantially, the projection of the US economic trend still points toward a growth rate above the trend. This pattern suggests that the market might again be overpricing the need for aggressive monetary easing in the future.
Daily digest market movers: Lower US inflation dampens US Dollar's appeal
- The decrease in US inflation, as gauged by the Consumer Price Index (CPI), was a main decider of the day's market dynamics.
- Headline CPI decelerated to 2.9% on a YoY basis in July from June's level of 3%, slightly below the market expectations.
- Core CPI (which excludes the fluctuating food and energy prices) stood at 3.2% YoY, an increase from 3.3% seen in July, aligning with the market predictions.
- The possibility of a cut by the Federal Reserve (Fed) in September stands at around 80%.
- These future easing probabilities will be highly dependent on other economic indicators.
DXY technical outlook: Bearish outlook steady, indicators deep in negative terrain
The technical indicators of DXY point to a persisting bearish market situation with buyers failing to generate a significant uptick. The index continues to anchor below the 20,100 and 200-day Simple Moving Averages (SMA), reinforcing the dominant bearish sentiment.
The Relative Strength Index (RSI), remains near 30, indicating steady selling pressure. On the other hand, the Moving Average Convergence Divergence (MACD) stabilizes, all the while remaining in negative territory with low, red bars.
Support Levels: 102.40, 102.20, 102.00
Resistance Levels: 103.00, 103.50, 104.00
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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