US Dollar Dips as Markets Wait for Jerome Powell to Save the Day

  • The US dollar breaks its winning streak with stocks rising amid risk appetite.
  • Markets are awaiting a change of stance from Fed Chair Powell on Tuesday.
  • The US Dollar Index is flirting with a break below 106 again, as seen on Monday.

He US Dollar Index (DXY) It stops its rise for now with the entry of the American session, which causes a change in trend and some selling pressure on the Dollar. In the bigger picture, the dollar is enjoying the change in the narrative on the rate differential since last week, which became wider against other currencies in favor of the US dollar. Additional tailwinds come from Israel, which has vowed to retaliate against Iran despite diplomatic efforts to ease tensions in the Middle East, now truly putting the region back on the brink of war.

Looking at economic data, the US dollar will not move much on Tuesday. The main event comes in the form of three members of the Federal Reserve (Fed), with Fed Chairman Jerome Powell being the most important. Powell's speech could change the position, since any variation in rate cut expectations or in the Fed president's outlook could cause a new rise in the Dollar or start a sharp decline.

Daily summary of market movements: Will Powell talk about everything?

  • While both the US and the EU have called for restraint and calm over the situation in the Middle East, both nations have issued sanctions against Iran for its offensive against Israel over the weekend.
  • At 12:30 GMT some data on housing in March was published:
    • Construction permits fell from 1,523 million to 1,458 million.
    • Housing starts also decreased, from 1,549 million to 1,321 million.
  • At 13:15 GMT the Fed will publish March industrial production and capacity figures:
    • Capacity Utilization will target 78.5% from 78.3%, based on expectations.
    • Industrial production will be at 0.4%, compared to the expected 0.1%.
  • A series of Fed speakers will try to guide markets:
  • At 13:00 GMT, Federal Reserve Vice Chairman Philip Jefferson will deliver a speech at the International Monetary Policy Research Forum in Washington, DC.
  • At around 16:30 GMT, Federal Reserve Bank of New York President John Williams will moderate a conversation at the Economy Club in New York.
  • Around 17:15 GMT, Federal Reserve Chairman Jerome Powell will participate in a panel discussion with Bank of Canada Governor Tiff Macklem at the Washington Forum.
  • US stocks continue to make strong gains, with the Nasdaq up more than 0.75% this Tuesday. European stocks fail to enjoy the change in trend and remain in the red.
  • According to CME Group's FedWatch tool, expectations of a Fed pause at the May meeting stand at 98.2%, while the odds of a rate cut stand at 1.8%. While there are calls for a rate hike, these are not yet represented in CME futures, and could contribute to further strength in the US Dollar once this possibility begins to be priced in.
  • The 10-year US Treasury bond yield is trading around 4.65%. A further move higher could even point to expectations of another rate hike before the easing cycle begins to take place.

US Dollar Index Technical Analysis: Not for the faint-hearted

The US Dollar Index (DXY) oscillates in the markets and the division between weak and strong currencies becomes increasingly solid. The Dollar seems to be the biggest gainer, while Europe and China seem very bleak about rates and keeping them stable for longer. With these major currencies poised to devalue substantially further in the coming weeks and months, the end of the US Dollar does not appear to be coming any time soon, as long as US data continues to be better. Bets on a weaker US dollar will dry up again and again

To the upside, the first level for the DXY is the November 10 high at 106.01, just above the 106.00 figure, which was surpassed overnight. Further up and above the round level of 107.00, the DXY index could find resistance at 107.35, the October 3 high.

On the downside, the first important level is 105.88, a pivot level since March 2023 and which demonstrated its importance on Monday by holding support. Further down, 105.12 and 104.60 should also act as support, ahead of the region with the 55-day and 200-day SMA at 103.97 and 103.84, respectively.

Frequently asked questions about interest rates

What are interest rates?

Financial institutions charge interest rates on loans from borrowers and pay them as interest to savers and depositors. They are influenced by basic interest rates, which are set by central banks based on the evolution of the economy. Typically, central banks are mandated to ensure price stability, which in most cases means targeting an underlying inflation rate of around 2%.

If inflation falls below the target, the central bank can cut base interest rates, in order to stimulate credit and boost the economy. If inflation rises substantially above 2%, the central bank typically raises core lending rates to try to reduce inflation.

How do interest rates influence currencies?

In general, higher interest rates help strengthen a country's currency by making it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates influence the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or depositing cash in the bank.

If interest rates are high, the price of the US Dollar (USD) usually rises and, since Gold is priced in dollars, the price of Gold falls.

What is the federal funds rate?

The federal funds rate is the overnight rate at which U.S. banks lend to each other. It is the official interest rate that the Federal Reserve usually sets at its FOMC meetings. It is set in a range, for example 4.75%-5.00%, although the upper limit (in this case 5.00%) is the figure quoted.

Market expectations about the Federal Reserve funds rate are tracked by the CME's FedWatch tool, which determines the behavior of many financial markets in anticipation of future Federal Reserve monetary policy decisions.

Source: Fx Street

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