The US Dollar (USD) is picking up steam again at the start of the US trading session on the back of a batch of strong US data, while traders are hearing signals out of Washington that a plan on the debt ceiling is taking form. The strong US data points confirm the stance of the Fed that inflation remains sticky and possibly another rate hike is acceptable. US President Joe Biden gave more details on Thursday night about the debt talks and reiterated that there will be no default on his watch.
On the macroeconomic data front, the Personal Consumption Expenditure (PCE) inflation numbers came out above estimates with most important: the PCE Core Delfator MoM at 0.4% against the previous 0.3% and the YoY at 4.7% against the previous 4.6%. The Fed is right to remain vigilant in terms of sticky inflation as Personal Spending for April jumped from previous 0.0% to 0.8%. The CME Fedwatch tool now prices in a 102% probability for a July hike with only just one rate cut left for this year. This is a seismic shift against the odds from last week with three rate cuts and no hikes at all priced in for the rest of the year.
Traders are not done yet for this Friday with the University of Michigan expectations and inflation expectations still due at 14:00 GMT. ALthough these are final readings for May, it can still move the needle further in favor of a stronger US Dollar. Should inflation expectations head higher as well, expect to see the DXY consolidate above 104 and see the Greenback print several session’s or weekly highs against some G10 currencies.
The US Dollar Index (DXY) has taken out both the 55-day and the 100-day Simple Moving Averages (SMA), respectively, at 102.43 and 102.85 on the upside. The US Dollar safe-haven status keeps seeing bids for the DXY, with 104 having been broken early on Thursday and now eases a touch as a debt-ceiling deal takes some shape.
On the upside, 105.73 (200-day SMA) still acts as long-term price target to hit, as the next upside key level for the US Dollar Index is at 104.00 (psychological, static level), and acts as an intermediary element to cross the open space.
On the downside, 102.85 (100-day SMA) aligns as the first support level to confirm a change of trend. In the case that breaks down, watch how the DXY reacts at the 55-day SMA at 102.48 in order to assess any further downturn or upturn.
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.