Market News

US Dollar Index Remains Firm on Yield Advantage

June 26, 2024

The upcoming US Core PCE Price Index shapes as the next swing point for US interest rate expectations. Due on Friday this week, the number is expected to show a decline from 0.2% to 0.1% on a monthly basis. Given that FOMC members pay particular attention to the Core PCE results, a moderate softening in the inflation gauge would likely see September firm as being the favourite month for the Fed to flick the switch to an easing interest rate bias. However, if we don’t see Core PCE budge from previous levels, or if the number creeps higher, markets may start to lean towards a November rate-cutting date.

In the lead up to this key piece of inflation data, the Dollar Index (DXY) remains firm, trading around the 105.50 level. The Fed is expected to be one of the later major central banks to reduce interest rates, and this yield advantage is keeping the greenback in the ‘good books’ of investors. Whether or not the DXY can maintain its stay above the 105-level heading into next week may come down to how much the Core PCE data alters the interest rate outlook.

Elsewhere in FX, the USDJPY rate is again trading on the doorstep of the 160 level. Based on the levels where intervention is presumed to have happened last time, it’s probably fair to say that nobody is monitoring the USDJPY’s approach to 160 more than Japanese monetary officials. The current bond yield spread between the US and Japan is the primary source of upside momentum in the USDJPY rate, so unless events occur which narrow this spread, there could be nervous times ahead for Japanese officials who know the perils of an excessively weak yen.

Meanwhile, upcoming elections in France and the UK could create some volatile moves in the euro and GBP in the coming weeks and months, as traders assess how changes in the political landscape could affect the fortunes or otherwise of these currencies.

In commodities, gold remains in familiar territory, having spent much of June in the $2300-$2350 region with little impetus to make a sustained breakout beyond this zone. Gold dipped overnight in response to move higher by the USD, which saw the precious metal trading at around the $2320 level (during Asian trading hours on Wednesday). Dips in the gold price remain relatively shallow courtesy of buyers stepping in from the sidelines on price retreats. Investors are still seeing dips as buying opportunities with a view to how gold may perform in the months ahead as central banks transition towards a lower interest rate environment. Levels to watch include support at $2312 and $2304, while on the topside resistance awaits at $2347, while $2368 would need to be breached for gold to surpass the highs from last week.

Oil lost some ground overnight. Though on the whole, June has been a productive month for energy markets with oil bouncing strongly from the early June lows. The WTI contract has recovered to the tune of an 11% rise from its early month lows. Support lies at $79.20, while resistance is at $82.34. Looking ahead, the oil market will remain reactionary to any news from the Middle East conflict as well as how stockpile levels vary over the northern hemisphere Summer period.

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