Strong Outlook for US Dollar as Bets on Fed’s Hawkish Stance Increase

• The DXY rose by more than 0.80% to 103.90 on Friday
• US Nonfarm Payrolls came in higher than expected for January.
• US bond yields are sharply increasing as markets push to May the start of the easing cycle.

On Friday, the US Dollar (USD) showed an impressive rise to 103.90 on the Dollar Index (DXY) chart. This gain was driven by a strong labor market report that has convinced markets a March rate cut is not likely.

Fed Chair Powell reinforced the idea that a rate cut in March is unlikely despite ongoing market speculation. He stated that the bank will monitor incoming data to set the timing of the easing cycle, and with the US labor market remaining tight, this could mean delaying rate cuts.

Daily digest market movers: US Dollar rallies as markets digest strong labor market data

• Unemployment for January held steady at 3.7%, lower than the 3.8% expected.
• Nonfarm Payrolls increased significantly, surpassing expectations for January. 353K additional jobs were created in the US against a projected 180K, indicating robust job market growth.
• Average Hourly Earnings for January, as per US Bureau of Labor Statistics, were up by 0.6% MoM, exceeding the consensus of 0.3%. 
• Annual Average Hourly Earnings for 2024 arrived at 4.5%, surpassing the previous 4.4%.
• US bond yields sharply rose with 2-year, 5-year and 10-year bonds trading at rates of 4.38%, 4.00% and 4.05%, respectively. 
• According to the CME FedWatch Tool, the odds of a rate cut in March plummeted to 20%.

Technical Analysis: DXY bulls show resilience and jump above the 200-day SMA

On the daily chart, indicators show a dominance of buying pressure, despite some contrasting signals. The Relative Strength Index (RSI) gliding on a positive slope and in positive territory suggests a build-up of buying momentum, which is further solidified by the rising green bars of the Moving Average Convergence Divergence (MACD). However, mixed signals emanate from the Simple Moving Averages (SMAs) as the index is above both the 20-day and 200-day SMAs, signifying a bullish outlook, but remains below the 100-day SMA, indicating a bearish hindrance.

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?  » …
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