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Dollar falls but closes the week with gains

by SuperiorInvest


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  • The DXY is trading just below the 200-day SMA as bulls try to hold their ground.
  • December existing home sales were weak, while University of Michigan consumer sentiment came in better than expected.
  • Dovish bets on the Fed remain high.

The US Dollar (USD) is experiencing some slight losses at the end of the week and currently stands at 0.90% weekly gain. Strong data from the University of Michigan (UoM) keeps the USD afloat, but steady dovish bets on the Federal Reserve (Fed) limit upside potential.

The US economy appears to be overheated, tempering dovish market expectations, although the odds of interest rate cuts in March and May remain around 50%. So, American dollar remains in choppy currents influenced by both resilient economic performance and dovish bets on likely Fed action.

Daily roundup of market moves: The US dollar is neutral as markets evaluate data on money and housing units

  • Michigan consumer expectations for January reported by the University of Michigan (UoM) came in at 75.9, up from December’s reading of 67.4.
  • Five-year inflation expectations fell slightly to 2.8% from 2.9% in the previous month.
  • Similarly, MJ’s inflation expectations for January fell to 2.9% from the previous 3.1%.
  • Current conditions for January increased to 83.3 from December’s 73.3.
  • December existing home sales from the National Association of Realtors (NAR) came in lower than expected at 3.78 million, versus expectations of 3.82 million.
  • US Treasury yields are still rising with the 2-year yielding 4.41%, the 5-year yielding 4.09% and the 10-year yielding 4.17%. All three are at their highest levels since mid-December.
  • According to the CME FedWatch Tool, the odds of a cut in March and May eased but remain high at 55% and 45%, respectively.

Technical analysis: DXY bulls show resistance, need to recover 200-day average

The Relative Strength Index (RSI) shows an upward trend that is in positive territory, which generally indicates bullish strength. This is concurrent with the Moving Average Convergence Divergence (MACD) which, driven by rising green bars, indicates strong buying momentum. However, these indicators are starting to flatten as the index has put together a five-day winning streak.

Taking into account the simple moving averages (SMA), the index is holding above the 20-day moving average, indicating an undercurrent of bullish dominance in the immediate short-term. However, if the bulls fail to recapture the 200-day SMA, further downside may be on the horizon.

Support levels: 103.20, 103.00, 102.80.
Resistance levels 103.40 (200-day SMA), 103.60, 103.80.

Frequently asked questions about interest rates

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by the base interest rates that central banks set in response to changes in the economy. Central banks are usually mandated to ensure price stability, which in most cases means aiming for a core inflation rate of around 2%.
If inflation falls below target, the central bank can cut key interest rates to stimulate lending and stimulate the economy. If inflation rises substantially above 2%, this usually results in the central bank raising key lending rates in an attempt to reduce inflation.

Higher interest rates generally help strengthen a country’s currency by making 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 putting cash in the bank.
If interest rates are high, this usually pushes up the price of the US dollar (USD), and since gold is valued in dollars, this has the effect of lowering the price of gold.

The Fed funds rate is the overnight rate at which US banks borrow from each other. It is the often quoted key rate set by the Federal Reserve at FOMC meetings. It is set as a range, for example 4.75%-5.00%, although the upper limit (5.00% in this case) is the given figure.
Market expectations for the future Fed funds rate are tracked by CME’s FedWatch tool, which determines how many financial markets are behaving in anticipation of future Federal Reserve monetary policy decisions.

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