US Dollar edges lower as markets digest Powell's words
- DXY Index declines as investors favor riskier assets following Powell's dovish speech.
- Powell hinted that the economic outlook is coming closer to the Fed’s goal.
- Markets have already priced in a September cut.
The US Dollar (USD), measured by the US Dollar Index (DXY), resumed its decline on Friday, falling from below the 101.00 level due to a shift toward riskier investments. This shift was influenced by the dovish tone of US Federal Reserve (Fed) Chairman Jerome Powell's speech at Jackson Hole.
Despite concerns about decelerating job growth, Fed officials, including Powell, maintain positive views on the US labor market. Data suggests that the US economy continues to expand above trend, suggesting that the market may be overestimating the need for rapid monetary easing.
Daily digest market movers: US Dollar softens after Powell’s speech
- Chair Powell stated that inflation has significantly declined, bringing the economy closer to the Fed's 2% target.
- Powell observed a noticeable cooling in the labor market, suggesting the economy is no longer overheated.
- Fed Chair also noted that the balance of risks has shifted, with reduced inflation risks but heightened concerns about employment.
- Chair Powell stated that future rate cuts will be determined by data, economic outlook and the balance of risks.
- Market participants have increased bets on a Fed rate cut in response to Powell's comments, with a September cut now being fully priced in.
DXY technical outlook: Bearish bias is clearer, correction possible
The technical outlook of the DXY Index remains bearish. However, buyers have been attempting to initiate an uptrend. The index remains below its 20, 100 and 200-day Simple Moving Averages (SMAs), indicating a bearish bias. The Relative Strength Index (RSI) is below 30, indicating continued and over-extended selling pressure. The Moving Average Convergence Divergence (MACD) remains in negative territory with red bars.
That being said, as indicators show oversold signals, there is potential for a correction to the upside.
Support Levels: 101.00, 100.50, 100.30
Resistance Levels: 101.50, 101.80, 102.20.
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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