The US Dollar (USD) is basking in the glory of re-founded belief from traders. Whereas last year markets were challenging the US Federal Reserve (Fed) by pricing in more rate cuts than what the dot plot suggested, investors are now defying the US central bank in the other direction. Markets are expanding their positions in the Greenback with the idea that the Fed will not cut interest rates three times as it projected on Wednesday, but at most two, as economic data signals the US economy is still growing at a healthy pace.
On the economic data front, there is no top data expected to be released this Friday. However, markets will head into the weekend with three US Federal Reserve speakers lined up. Comments from US Fed Chairman Jerome Powell did not have any market moving impact.
The US Dollar Index (DXY) must be thinking markets have gone crazy with their 180 degree shift after the Fed meeting. Markets were positioned for several and early interest-rate cuts back in December, but these aspirations have been tuned down quite a lot. The stand-off with the Fed could not be bigger: while Wednesday’s dot plots showed Fed officials are still expecting three rate cuts for this year, markets are pricing in only two cuts and very late in the year.
The DXY is heading for those highs of February, after a fresh high for March was posted this Friday morning. On the upside, 104.96 remains the first level in sight. Once above there, the peak at 104.97 from February comes into play ahead of the 105.00 region with 105.12 as the first resistance.
Support from the 200-day Simple Moving Average (SMA) at 103.71, the 100-day SMA at 103.52, and the 55-day SMA at 103.58 are getting a fresh chance to show their importance. The 103.00 big figure looks to remain unchallenged for now after the decline from the Fed meeting got turned around way before reaching it.
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.