The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, has declined ahead of today's Federal Open Market Committee (FOMC) decision. Market consensus anticipates a 25-basis-point (bps) rate cut, although some analysts predict a larger 50 bps reduction. The Fed's Dot Plot, which outlines the FOMC members' projections for future interest rate movements, will be closely scrutinized for any signs of a dovish shift.
The pricing of the markets of a 50 bps cut seems unrealistic as, despite weakness in the labor market, the overall economy is showing resilience.
Technical analysis of the DXY index suggests a negative outlook, with indicators remaining in negative territory. In addition, the loss of the 20-day Simple Moving Average (SMA) indicates a fading buying momentum.
The Relative Strength Index (RSI) is pointing downwards and remains below 50, indicating bearish sentiment. The Moving Average Convergence Divergence (MACD) is printing lower green bars, further supporting the bearish trend. Supports are identified at 100.50, 100.30 and 100.00, while resistance levels lie at 101.00, 101.30 and 101.60.
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.