US Dollar gives up ground after disapointing PPI figures
- DXY index slips below 103.00 as US Producer Price Index figures disappoint.
- US economic growth continues to trend upwards, suggesting markets may be overestimating aggressive easing requirements.
- CPI is now in focus for a clearer inflation outlook.
On Tuesday, the US Dollar (USD), measured by the US Dollar Index (DXY), showed a mild decline falling under the 103.00 level. This drop followed disappointing Producer Price Index (PPI) figures, which fell short of analysts' estimates.
Based on the entire economic data, the US economy continues to achieve growth above the trend. This suggests that market participants may be overestimating the need for aggressive monetary easing as the Federal Reserve (Fed) may request more data before cutting.
Daily digest market movers: Mild decline follows underwhelming PPI figures
- The release of the Producer Price Index (PPI) for final demand in the US showed a YoY rise of 2.2% in July, less than the market expectation of 2.3%.
- The annually adjusted core PPI also rose by 2.4%, missing analysts' estimated increase of 2.7%.
- On a monthly scale, the PPI saw a 0.1% rise, while the core PPI remained unmoved.
- As for now, A 50-basis-point cut is possible but will entirely depend on the data, with current odds at around 55%. The market is still fully expecting 100 basis points of easing by the end of the year and a total of 175-200 basis points of trimming over the next 12 months.
- This rate path seems improbable unless the US economy enters a severe recession.
DXY technical outlook: Bearish trends continue amid weak buying efforts
There is no significant change in the technical outlook for DXY, bearing in mind the moderate selling pressure. The momentum-based Relative Strength Index (RSI) is stable below the 50 mark, indicative of a sustained selling approach. The Moving Average Convergence Divergence (MACD) continues to graph negative values as the red bars level off, demonstrating continued bearish activity despite flat market movement on Tuesday.
The Index position rests beneath the 20, 100 and 200-day Simple Moving Averages (SMAs), pointing to a predominantly bearish trend.
Support Levels: 102.80, 102.50, 102.20
Resistance Levels: 103.00,103.50, 104.00
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.
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