US Dollar makes knee-jerk reaction after Fed dovish remarks
- The US Dollar recovers on Thursday after its brief moment of weakness on Wednesday.
- Traders were surprised by the dovish Fed, which continued to anticipate three rate cuts this year.
- The US Dollar Index fell to the lower end of 103.00 before staging a rebound.
The US Dollar (USD) is entering a patch of volatility after markets got caught by surprise on Wednesday when the release of the Fed monetary policy decision revealed that the Federal Open Market Committee (FOMC) is still committed to cut interest rates three times this year. Markets had already repriced their stance to just two cuts ahead of the Fed event. The repricing of the Fed statement resulted in ample US Dollar weakness, with equities rallying substantially higher.
On the economic data front, Thursday’s points could not come at a better time. With the preliminary Purchasing Manager Index (PMI) numbers to be released, markets can get confirmation if the Fed is right to stick to three cuts. A continuing strong economy could result in the Fed tuning down its rate cut expectations to only two or one cut in order to keep control of inflation as firm demand tends to fuel inflation.
Daily digest market movers: Fed view to be confirmed by data
- The Swiss National Bank (SNB) has cut its interest rate by 25 basis points from 1.75% to 1.50%. The Norwegian Norges Bank kept rates unchanged at 4.50%.The Bank of England is keeping its policy rate unchanged as well, seeing it too early to cut just yet.
- Thursday’s US economic data releases start at 12:30 GMT with a mixture of data:
- Current Account data for Q4 is seen heading from a $200.3 billion deficit to $209.0 billion.
- The Philadelphia Fed Manufacturing Survey for March is expected to head from 5.2 to a contraction at -2.3.
- Initial Jobless Claims for this week are expected to climb from 209,000 to 215,000.
- Continuing Jobless Claims were last week at 1.811 million.
- S&P Global will release its preliminary Purchasing Managers Survey for March at 13:45 GMT:
- The Services PMI is expected to head from 52.3 to 52.
- The Manufacturing PMI should be heading from 52.2 to 51.7.
- The Composite PMI was at 52.5 in February, with no forecast pencilled in.
- At 14:00 GMT, Existing Home Sales data will come in, with a small retreat from 4 million to 3.94 million expected.
- Federal Reserve's Vice Chair for Supervision Michael Barr will speak around 16:00 GMT.
- Equities are holding on to overnight gains and are advancing further. Japan and China saw all their major indices close off with more than 1.5% gains. European equities are steady just below 1% and US equity futures are seeing the Nasdaq leading the charge by soaring near 1% ahead of the US opening bell.
- According to the CME Group’s FedWatch Tool, expectations for the Fed’s May 1 meeting are 91.5% keeping the rate unchanged, while chances of a rate cut are at 7.5%.
- The benchmark 10-year US Treasury Note trades around 4.23%, the lower end of this week.
US Dollar Index Technical Analysis: Thank you Fed
The US Dollar Index (DXY) is turning into a snooze fest after the Fed meeting on Wednesday. The DXY is jumping this Thursday, partly erasing the losses from Wednesday after markets repriced again to three cuts. Traders should be very well aware that entering a trade in US Dollar means tighter entries and stop losses as volatility in the past three months (January 2024 to March 2024) was only around 6.5%, less than the 14% seen in the three months before (September 2023 to December 2023)
The DXY is on track to break back above the 200-day Simple Moving Average (SMA) at 103.70 before moving back above 104.00. 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.
Support from the 200-day Simple Moving Average (SMA) at 103.70, the 100-day SMA at 103.54, and the 55-day SMA at 103.53, fell short of providing enough cushion during the Fed meeting. The 103.00 big figure looks to be rather a level to focus on for future reference when the DXY tanks. In case 103.00 does not hold, 102.48-102.35 comes in with the low of March as a level to watch.
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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