The DXY rose to 104.80 on Tuesday, past the key resistance of the 100-day SMA.
US Treasury yields soared as January’s Core CPI came in higher than expected.
The odds of a cut in May have fallen to 40%, according to the CME FedWatch Tool.
The US Dollar (USD) witnessed an upward thrust on Tuesday, trading at 104.80 on the Dollar Index (DXY) reaching its highest level since mid-November. The Greenback was boosted by January’s Consumer Price Index (CPI), which made markets delay the start of the Federal Reserve’s (Fed) easing cycle.
After Jerome Powell, the Federal Reserve Chair indicated that a cut in March was unlikely due to the bank still needing additional evidence on falling inflation, higher inflation than expected on Tuesday benefited the US Dollar as markets begin to eye June as the start of easing.
Daily digest market movers: US Dollar soars as Core CPI from January comes in higher than expected
Reports by the US Bureau of Labor Statistics showed a 0.4% MoM increase in the Core inflation rate for January, surpassing the consensus and previous figures of 0.3%.
On a YoY basis, Core inflation remained steady at 3.9%, maintaining the previous numbers but outdoing the forecasted 3.7%.
A rise in the US Treasury bond yields was observed following the data. Current rates place the 2-year yield at 4.60%, the 5-year yield at 4.26%, and the 10-year yield at 4.27%, which benefits the US Dollar.
Market expectations for rate cuts based on the CME FedWatch Tool for the next May meeting dropped to 40%, while those odds rose to 50% for the June meeting.
Technical analysis: DXY bulls step in and conquer the 100-day SMA
On the daily chart, the Relative Strength Index (RSI) exhibits a positive slope and trades in positive territory, indicating a strong buying momentum among investors. This reveals that the market is demonstrating buyer dominance, supporting the notion of further upward market movement.
The Moving Average Convergence Divergence (MACD) histogram illustrates rising green bars, reinforcing the bullish momentum painted by the RSI. This suggests that investors are displaying a strong risk appetite and are buying the asset aggressively.
In a broader context, the index is now trading above its 20, 100, and 200-day Simple Moving Averages (SMAs), suggesting a bullish market structure. The position of the DXY above these significant SMAs bolsters the dominance of bulls on larger time frames.
In conclusion, the technical indicators on the daily chart conclusively reflect a prevalent buying momentum in the market. This, coupled with the fact that bulls are gaining ground, means a sustainable move in the upward direction would more likely be the order of the day in the foreseeable future in case bulls receive additional fundamental stimulus.
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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