- The Greenback dropped over 1.5% on Tuesday, its worst performance in over a year.
- Traders are seeing the US Dollar getting stronger again on the back of stronger Retail Sales data.
- The US Dollar Index tries to recover some losses and heads back above 104.
The US Dollar (USD) is trading into a new reality on Wednesday while it tries to regain confidence by at least trying to recover some losses. Lower-than-expected Consumer Price Index (CPI) numbers for October led to a tectonic shift in all asset classes of financial markets: equities jumped, commodities rallied, bonds surged and in the forex market the Scandinavian and Central-Eastern European (CEE) currencies were the biggest winners on the back of a losing Greenback.
The calendar for this Wednesday played out as expected: expectations were too high after the positive weaker CPI number. An uptick in Retail Sales and PPI numbers keeping their pace are no adding more fuel to the repositioning of Tuesday. The US Dollar Index (DXY) is expected to claw back further now, while traders brace for any headlines from San Francisco, where US President Joe Biden will meet with ChinesePresident Xi Jinping.
Daily digest: US Dollar tries to take back control
- The US budget deadline is due to kick in on November 17. Sentiment was further boosted on Tuesday by growing hopes that a Us government shutdown would be avoided.
- US President Joe Biden is set to meet Chinese President Xi Jinping at the historic Filoli estate south of San Francisco on Wednesday.
- Wednesday’s calendar has kicked off with the print of the Mortgage Bankers Association (MBA)’s weekly mortgage applications which rose by 2.8% last week.
- Around 13:30 GMT, the New York Empire State Manufacturing Index for November was released. a firm beat of expectations from -4.6 to 9.1.
- A big batch of data was released at 13:30 GMT:
- The Producer Price Index (PPI):
- The monthly headline PPI went from 0.4% to -0.5%.
- The monthly Core PPI went from 0.2% to 0.0%.
- The yearly headline PPI went from 2.2% to 1.3%.
- The yearly Core PPI went from 2.7% to 2.4%.
- US Retail Sales figures:
- The monthly figure for October went from an upward revised 0.9% to -0.1%.
- The Retail Sales Control Group number went from 0.7% to 0.2%.
- The Producer Price Index (PPI):
- Around 15:00 GMT, Business Inventories for September are expected to remain steady at 0.4%.
- Equities are taking over the enthusiasm from Tuesday. The Hang Seng is the biggest winner, up over 3%. In Europe, all important European indices are near 1% in the green, while US equities futures only mildly up.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 94.5% chance, up from 85.7% on Tuesday morning, that the Federal Reserve will keep interest rates unchanged at its meeting in December.
- The benchmark 10-year US Treasury yield trades at 4.49%, which is a substantial move lower from the 4.64% on Monday.
US Dollar Index technical analysis: US Dollar not KO yet
The US Dollar had its worst intraday performance in over 52 weeks, with a devaluation of more than 1.50% in the US Dollar Index (DXY). Nonetheless, traders need to watch out as the Greenback could put up a fight. Hopes for even more fading inflation are high ahead of the Producer Price Index (PPI) data, so the odds are in favor of the Greenback to at least erase some losses from Tuesday in the DXY.
The DXY is being stopped around the 100-day Simple Moving Average (SMA) near 104.15. Expect to see a bounce from there with 105.29, the low of November 6, as the market where the DXY should try to close above for this week. From there, the 55-day SMA at 105.71 is the next market on the topside that needs to be reclaimed by US Dollar bulls before starting to think of more US Dollar strength to come into play.
Traders were warned that when the US Dollar Index would slide below that 55-day SMA, a big air pocket was opening up that could see the DXY fall substantially, and did materialise on Tuesday. For now the 100-day SMA tries to hold, though at 103.61, the 200-day SMA is a much better candidate to look for support. Should that level even be broken substantially, a long term sell-off could get underway with the DXY falling between 101 and100.
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.