The DXY declined to 104.20 on Tuesday.
The US service sector continues to show robustness, making markets disregard an interest rate cut in March.
US Treasury yields continue to rise, boosting the Greenback.
The US Dollar (USD) Index, currently trading at 104.20, has been on a downward trend due to investors cashing in their profits alongside the impact of statements from Loretta Mester, the president of the Federal Reserve Bank of Cleveland. Mester warned about the risks of doing too much in terms of tight monetary policy and how it could affect the labor market.
The US Federal Reserve’s hawkish hold, justified by a robust jobs report and continuous strong growth in Q1, made expectations for Federal Reserve (Fed) rate cuts begin to wane. This has favored the Greenback in the last few sessions. Several other Fed officials will be on the wires during the week, and they may dictate the pace of the USD as markets await fresh economic reports.
Daily digest market movers: US Dollar declines on the back of lower US Treasury yields
Fed’s Loretta Mester commented that the bank should be attentive to risk that the labor market will cool faster than expected in reaction to restrictive monetary policy.
She also added that the Fed will gain the confidence to cut this year.
In her view, she is expecting three rate cuts in 2024.
US Treasury yields are declining with 2-year, 5-year and 10-year bonds trading at of 4.40%, 4.04% and 4.09%, respectively.
CME’s FedWatch Tool hints at lesser odds for a rate cut in March, which currently stand at 15%. Those odds rise to 50% for the May meeting, but the probabilities of a hold are also high.
Technical analysis: DXY bulls give up the 20-day SMA while taking profits
The indicators on the daily chart are reflecting a short-term shift in momentum toward the sellers, yet the long-term trend still seemingly remains in favor of the bulls. Despite a negative slope, the Relative Strength Index (RSI) is holding onto positive territory, suggesting a pullback or period of consolidation instead of a major trend reversal.
The flat green bars in the Moving Average Convergence Divergence (MACD) indicate potential indecision in the market where the momentum could easily shift in favor of buyers with the right catalyst. However, this flat-lining action in the MACD may also signify exhaustion from buyers, hinting that bears might soon step in to take control.
Given the index position with relation to its Simple Moving Averages (SMAs), the bulls, although weakened recently due to profit-booking, seem to have a major say in the broader trend. The DXY is trading above the 100 and 200-day SMAs, suggesting an overall bullish bias in the longer-term market sentiment even though it slipped underneath the 20-day SMA.
US 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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