US Dollar struggles as markets asses Fed cut

• FOMC meeting ended with 50 bps interest rate cut to the 4.75%-5.00% range.
• The Dot Plot suggests a gradual easing cycle that hints at three cuts in 2024.
• Chair Powell stressed during his presser that the Fed is not in a rush.

The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, is trading flat near 100.70 on Thursday as the market digests the Federal Reserve's (Fed) 50-basis-point (bps) cut. The market overreacted to the news, intensifying expectations of further easing despite the Fed's efforts to indicate a gradual easing cycle. On Thursday, the US released strong Initial Jobless Claims figures, which stopped the USD’s bleeding.

The United States economy is experiencing mixed signals with signs of both deceleration and resilience. While some economic indicators suggest a slowdown, others indicate that activity remains robust. The Fed has indicated that the pace of future interest rate adjustments will be guided by incoming economic data, so the DXY index will be sensitive to incoming reports.

Daily digest market movers: US Dollar declining, market pricing in more easing

• FOMC cut rates by 50 bps on Wednesday, although the Dot Plot suggests a more gradual easing cycle going forward.
• Despite the Fed's efforts to push back against market easing expectations, they have intensified.
• After initially lowering its expectations following the decision, the market is now factoring in an additional 75 basis points of rate cuts by the end of the year.
• The market anticipates close to 250 basis points of further cuts over the next year, which would bring the fed funds rate significantly below the neutral level.
• Fed released updated macro forecasts, which show that growth remains robust in Q3.
• On the data front, US citizens who newly applied for unemployment insurance benefits reached 219K in the week ending September 14, below expectations and the previous weekly figure.
• Advance seasonally-adjusted insured unemployment rate was 1.2%, and the 4-week moving average was 227.

DXY technical outlook: DXY under bearish momentum, must recover 101.00

The DXY index indicators remain bearish, having lost the 20-day Simple Moving Average (SMA). Selling traction is mounting with the Relative Strength Index (RSI) trending downward below 50. The Moving Average Convergence Divergence (MACD) is printing lower green bars, indicating a shift to bearishness.

Supports are located at 100.50, 100.30 and 100.00, while resistance levels are at 101.00, 101.30 and 101.60.

Interest rates FAQs

What are 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 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.

How do interest rates impact currencies?

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.

How do interest rates influence the price of Gold?

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.

What is the Fed Funds rate?

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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