US Dollar enters fifth day of winning streak ahead of Fed decision
- The US Dollar advances relentlessly for a fifth consecutive day.
- Traders brace for the Fed decision, with Powell and new economic projections on the docket.
- The US Dollar Index snaps above 104.00, continuing its bullish narrative.
The US Dollar (USD) is tearing down the 104.00 level on Wednesday after it briefly failed to do so on Tuesday in the Bank of Japan aftermath. All eyes are on the US, with the US Federal Reserve (Fed) set to issue its monetary policy statement followed by a speech and comments from Fed’s Chairman Jerome Powell. the crucial element will be the so-called dot plot (or Philip’s Curve), which should give markets more insights on whether three or only two cuts are expected for this year.
In the dot plot, each voting member of the Fed’s Federal Open Market Committee (FOMC) will pencil in his or her view on where rates will be in the current year, one year ahead, and in the longer term. Markets have been pushing for a stronger US Dollar these past few days amid increasing speculation that the Fed might signal fewer than three rate cuts for this year. The Dot Plot release this evening will give markets confirmation on this, and could see some US Dollar weakness in case forecasts of three cuts are still on the table.
Daily digest market movers: Ahead of Fed
- The US is mulling to impose sanctions on chips and technology companies from China, Bloomberg reports.
- Ahead of the Fed, the Mortgage Bankers Association has released the weekly Applications Index at -1.6% . The previous number was an increase of 7.1%.
- The Fed Rate Decision release is taking place at 18:00 GMT, which includes:
- The Monetary Policy Statement
- The FOMC Economic Projections
- Near 18:30 GMT, US Fed Chairman Jerome Powell will speak to markets and deliver his statement followed by a Q&A with the press.
- Equities are in the red again despite the US closing bell saw all major indices closing off in the green after the eventful Tuesday.
- According to the CME Group’s FedWatch Tool, expectations for a Fed pause in today’s meeting are at 99%, while chances of a rate cut stand at 1%. For the next meeting on May 1, 92.4% see the rate unchanged, with 7.5% opting for a rate cut..
- The benchmark 10-year US Treasury Note trades around 4.28%, a touch softer than Tuesday.
US Dollar Index Technical Analysis: Does it really matter?
The US Dollar Index (DXY) is heading back above 104.00 on Wednesday ahead of the US Fed rate decision. The strong US Dollar comes as markets start to pare back their euphoria from earlier this year, when three swift rate cuts were expected. Expectations have been tuned down to only two cuts and done. In this context,the dot plot release could see the DXY paring back some earlier gains to look for a balanced middle ground.
On the upside,104.96 remains the first level in sight. Once above there, the peak at 104.97 from February comes into play, ahead of the 105.00 region with 105.12 as the first resistance.
Some support should come in from the 200-day Simple Moving Average (SMA) at 103.70, the 100-day SMA at 103.58, and the 55-day SMA at 103.52. The 103-area, thus, looks well equipped and covered with support levels to catch any retreats in the DXY.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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