Interest Rates Speculation Fuels the US Dollar, Stocks Surge

Over the past 18 months, investors have rarely seen the US Dollar and US Equities simultaneously rise in value. However, this has been a reoccurring occurrence over the past week. The US Dollar and the US equities have continued to increase in value throughout the week. Yesterday, US Dollar Index saw its most robust increase and is now hovering at a 2-month-high. However, the price of the Dollar this morning is retracing, declining by 0.25%. However, traders should be cautious that the price is still trading within an upward trend pattern. 

As the US Dollar and the stock market’s performance improves due to earnings and interest rates, the price of Gold has come under significant pressure. This is mainly due to the instrument’s inverse correlation with the Dollar and investor confidence. The price of Gold over the past two weeks has declined by 3.20%. However, the price this morning has slightly rose as the Dollar retraces. Investors will primarily be concentrating on the price action of the Dollar and the overall market sentiment. Technical analysis is still pointing towards a downward price movement; however, this largely depends on the Fed’s monetary policy. If the central bank does not proceed with an interest rate pivot and the policy remains within a restrictive territory, the price of Gold may remain under pressure. 

The ongoing debt ceiling negotiations have also supported the price of global assets. According to the house speakers and the US president, negotiations are proceeding, and a deal is likely to be agreed over the weekend. The deadline for negotiations is the 1st of June. 

EUR/USD - Interest Rate Speculation Fuels the US Dollar

The price of the EUR/USD has declined for three consecutive days and is now trading at its lowest price since March 27th. The EUR/USD has formed a relatively straightforward downward trend pattern as the US Dollar has appreciated against the whole market, and the Euro has declined. For this reason, the exchange rate has avoided a “tug of war” situation. The exchange rate price is forming lower lows and lower highs on most timeframes, including the 1-hour, 4-hour, and daily. 

EUR/USD 1-Hour Chart on May 19th 

One of the main reasons for the Dollar's increase in value is the change in the forward guidance provided by the Federal Market Committee. At the beginning of the month, market participants believed the regulator would not increase interest rates at June’s meeting. The indications from the Chairmen of the Federal Reserve was that the Fed would pause for 2–3 months as they re-evaluate how inflation is being affected by the restrictive policy. However, over the past week, many committee members have advised that the federal fund rate must continue rising. According to Bloomberg, 40% of experts now believe the Federal Reserve will increase interest rates by 0.25% at June’s meeting. 

According to the committee members, economic and inflation data do not necessarily warrant pausing the hiking cycle. This week we saw confirmation that retail sales continue to rise, and the weekly unemployment claims were lower than markets expected. The PCE Price Index is a crucial figure for the Federal Reserve, which may be the deciding factor. The PCE Price Index is scheduled to be released next Friday and will need to read less than 0.3% for traders to be sure the Fed will not opt to hike again. 

On the other hand, the ECB will have to keep raising the interest rate to return inflation to the mid-term target of 2%. Most experts believe the ECB will continue increasing interest rates, but will stick to the minimum hike option. Officials also advised that the ECB remains concerned about rising core inflation, especially in the services sector. Regardless of the almost certain interest rate hikes, the Euro is declining against the market as the Dollar regains lost ground. 

NASDAQ - US Stocks Surge

The NASDAQ continues to increase in value and completes its most vital day of trading for May. Yesterday, the price increased by 2.15% but slightly declined during this morning’s futures session. Nonetheless, investors will mainly be looking at the price action closer to the opening of the US session and will be less concerned about the slight retracement this morning. The NASDAQ is trading at its highest price since April 2022 and has increased by more than 27% in 2023. 

The price of the NASDAQ continues increasing regardless of the possibility of higher interest rates. The main reason before the climb is the strong earnings season, a higher chance of a soft landing and a resilient economy. The latest earnings, which have supported the US stock market, come from Walmart. Walmart’s revenue read almost 3% higher than what markets expected, and the earnings per share read nearly 12% higher. Due to this, the stock price increased during the US trading session and after the market close. 

NASDAQ Weekly Chart on May 19th 

Further bullish signals will likely form if the price breaks above $13,907. In contrast, bearish signals may develop if the price declines below $13,800.

Summary:

• The EUR/USD has declined for three consecutive days and is trading at its lowest price since March 27th.  
• The US Dollar has appreciated against the whole market, and the Euro has been declining.
• According to Bloomberg, 40% of experts believe the Federal Reserve will increase interest rates by 0.25% at June’s meeting.
• The NASDAQ is trading at its highest price since April 2022 and has increased by more than 27% in 2023.