US Dollar exhibits mild gains ahead of Fed decision
- The USD Dollar extended its gains on Wednesday.
- All eyes are set on the updated Dot Plot and Chair Powell’s tone.
- Any hawkish or dovish surprise from the Fed may trigger volatility in the USD.
The US Dollar Index (DXY) is currently trading near 104, demonstrating a gain not witnessed since March 1. The Greenback has been steadily ascending for the fifth day in a row, backed up by strong economic data and rising US Treasury yields in the last few sessions. However, the short-term trajectory will be dictated by the Federal Reserve’s (Fed) stance and projections.
The US economy remains resilient, with little evidence of inflation coming down and the labor market showing mixed signals. Investors will closely evaluate Chair Jerome Powell’s stance and how confident he is regarding cutting rates.
Daily digest market movers: DXY's rally persists as investors await FOMC decision and projections
- Markets are still expecting three rate cuts in 2024, starting in June, which matches the last projection from Fed officials.
- The focus will be on the Summary of Economic Projections (SEP) and how confident the bank is on the inflation progress.
- Any shifts seen in the Dot Plot may trigger a reaction in the Greenback.
DXY technical analysis: DXY's bullish momentum is under control, yet volatility is on the horizon
The technical indicators on the daily chart reflect strong buying momentum. The Relative Strength Index (RSI) registers a positive slope in bullish territory, underlining the dominating force of buyers. Simultaneously, the Moving Average Convergence Divergence (MACD) confirms this bullish sentiment by showing rising green bars, suggesting a sustained upward momentum for DXY.
The Simple Moving Averages (SMAs) provide further substantiation of this bullish market control. The index maintains a position above the critical 20, 100, and 200-day SMAs, highlighting a broader positive perspective.
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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