US Dollar hits fresh year-to-date high supported by increasing expectations of interest-rate differentials

Source Fxstreet
  • The US Dollar extends gains on Friday, trading at the strongest level since mid-November.  
  • Traders are pushing the Greenback higher as the interest-rate divergence between the Fed and other central banks looms large.
  • The US Dollar Index rallies towards 106.00.

The US Dollar (USD) continues to strengthen on Friday and is set for the best week this year so far, snapping out of the tight bandwidth it had traded this 2024. Investors don’t seem to be taking profits despite the recent rally,  which could mean that more US Dollar strength is on the cards for next week. The main driver for the move is the breakdown in European bonds, with yields sinking against very steady ones in the US, as the rate differential between both sides of the Atlantic expands. 

On the economic data front, traders are starting to applaud good data under the label of US exceptionalism. Equities could well be set to rally as well despite higher interest rates, buying the idea that there is no landing taking place in the economy and that the current level of high rates is even good to keep it from overheating.  The University of Michigan numbers this afternoon could build up a case further for the above narrative.

Daily digest market movers: All comes into play for USD

  • The Import and Export Price Indexes data for March is due 12:30 GMT:  
    • The monthly Export Price Index is expected to increase 0.3%, down from  0.8% a month earlier. . 
    • The monthly Import Price Index is expected to grow 0.3%, steady from the previous month. 
  • The University of Michigan preliminary numbers for April will be released at 14:00 GMT:
    • Consumer Sentiment is expected to decline a touch to 79 from 79.4.
    • Inflation expectations were at 2.8% previous, with an uptick expected after the recent Consumer Price Index (CPI) numbers.
  • Three US Federal Reserve Speakers take the stage later on Friday:
    • At 17:00 GMT, Federal Reserve Bank of Kansas City President Jeffrey Schmid will deliver a keynote speech.
    • Around 18:30 GMT, Federal Reserve Bank of Atlanta President Raphael Bostic delivers a speech on the Housing Crisis.
    • Finally, at 19:30 GMT, Federal Reserve Bank of San Francisco President Mary Daly will participate in a debate at a Fintech Conference.
  • European equities are jumping higher, with the inverse correlation in EUR/USD. Both the Dax and Stoxx 50 are up over 1%. US Futures are still looking for direction with hesitant buyers. 
  • The CME FedWatch Tool prices in a 93.4% probability of no changes in the policy rate for May 1. For now, odds are the highest for September 18 with a 44.7% chance of a first rate cut against 28.5% for an unchanged stance.
  • The benchmark 10-year US Treasury Note trades around 4.54%, retreating a touch after hitting 4.59% overnight on Thursday. 

US Dollar Index Technical Analysis: Game-changing moment for 2024

The US Dollar Index (DXY) performance shows that markets are still trembling after this week’s shocks. Hot US price pressures for a third consecutive month are quickly shifting Fed rate cut bets to later this year, breaking the governing dynamics for this year thus far. 

From now on, it becomes clear that whichever central bank – and accordingly the currency – needs to start cutting its benchmark rate will face severe punity from markets. On the contrary, central banks keeping rates steadier for longer are likely to be rewarded with a further appreciation in their currency provided that their economy is robust despite the current high rate regimes. The pack is being split in half: while weaker economies are set to get their currencies exposed, stronger ones are expected to rally further. 

On the upside, the first level for the DXY is the November 10 high at 106.01, just above the 106.00 figure. Further up and above the 107.00 round level, the DXY Index could meet resistance at 107.35, the October 3 high. 

On the downside, fresh support levels need to be pencilled in as well, with the first important level at the 105.00 big figure. Further down, 104.60 should also act as a support, ahead of the region with both the 55-day and the 200-day Simple Moving Averages (SMAs) at 103.97 and 103.84, respectively.

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.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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