- The DXY index first declined to 104.00 and then recovered to 104.40.
- The headline and core PPI cooled down in October, while US Retail Sales declined but were lower than expected.
- Investors seem to worry that strong economic activity data might weigh more than cooling inflation in the Fed’s eyes.
The US Dollar (USD) found a lift in Wednesday’s session, driven by solid US Retail Sales figures for October, which somewhat worried investors as Federal Reserve (Fed) officials might consider it a threat to the progress on inflation.
Nonetheless, considering that inflation and employment creation in the United States economy are both cooling down, it is highly unlikely that the Federal Reserve (Fed) will raise interest rates at the upcoming December meeting. That being said, the bank will receive additional CPI and Nonfarm Payrolls reports before its last decisions of 2023, which could impact whether they ultimately decide to hike or not.
Daily Digest Market Movers: US Dollar finds support on strong Retail Sales and rising yields
- The US Dollar Index recovered to 104.40 from a low of around 103.98 and stands at its lowest point since September.
- The US Bureau of Labor Statistics reported that October witnessed a less-than-expected increase of 1.3% YoY in the US Producer Price Index (PPI), falling short of the projected 1.9% rise. It also printed a monthly decline of 0.5% below the expected 0.1% growth.
- In addition, the Core Producer Price Index (PPI) from October fell short of expectations. It came in at 2.4% YoY vs the expected 2.7% and declined from its previous reading of 2.7%.
- On the other hand, the Retail Sales from October came in better than expected, declining by 0.1% MoM vs the expected 0.3% decline.
- US Treasury yields slightly recovered, with the 2-year rate increasing to 4.91%, while the 5 and 10-year rates rose to 4.52% and 4.53%, respectively.
- According to the CME FedWatch Tool, the odds of a 25-basis-point hike in December are zero. Also, markets arel betting on rate cuts appearing sooner than expected in May 2024, if not March.
Technical Analysis: US Dollar bulls step in and defend the 100-day SMA, outlook still negative
The daily chart suggests that the DXY has a neutral to bearish technical outlook with bulls having lost significant ground in Tuesday’s session. With a downward trend below its midline, the Relative Strength Index (RSI) suggests a bearish sentiment, while the Moving Average Convergence Divergence (MACD) histogram exhibits larger red bars.
Zooming out, despite the bears gaining ground and pushing the index below the 20-day Simple Moving Average (SMA), it is still above the 100 and 200-day SMAs, suggesting that the bulls are in command on the larger time frames.
Support levels: 104.15 (100-day SMA),103.60 (200-day SMA), 103.30.
Resistance levels: 104.50, 105.00,105.30.
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.