US Dollar stands flat as market awaits FOMC Minutes
- The US Dollar Index shows some weakness ahead of FOMC Minutes from the January meeting with a slight decline to 104.00.
- The Fed's intention to keep rates untouched may fuel further gains for the US Dollar.
The US Dollar Index (DXY) experienced a slight setback, resting at 104.00 in Wednesday’s session.
The US economy, backed by robust data, shows resilience, reflected in the strength of the Greenback in 2024. Meanwhile, the Federal Reserve (Fed) maintains a hawkish stance, dismissive of near-term rate cuts and keen on keeping rates at restrictive levels. The market aligns progressively with this view, reinforcing expectations of a delayed easing cycle.
Daily digest market movers: The US Dollar struggles to gain ground as investors look for drivers in the FOMC minutes
- The market’s highlight will be the release of the Federal Open Market Committee (FOMC) Minutes from the last January meeting at 19:00 GMT, which may fuel volatility in the next Fed decision expectations.
- As for now, the CME FedWatch Tool indicates a 20% chance of a rate cut at the next meeting in March and also remains low for May, reflecting the market sentiment leaning toward the Fed's intent to hold rates steady at restrictive levels.
- Markets are now pushing the start of the interest rate easing to June.
Technical analysis: DXY bulls stand weak and must recover the 100-day SMA
The indicators on the daily chart reflect a balance between buying and selling pressure. The Relative Strength Index (RSI) is in positive territory, but its negative slope suggests that buying momentum is losing steam. The Moving Average Convergence Divergence (MACD), with its decreasing green bars, implies that any bullish momentum is weakening and could potentially flip into a bearish bias.
Furthermore, the positioning of the index compared with its Simple Moving Averages (SMAs) provides an interesting perspective. Despite the bearish pressure, bulls have managed to keep the DXY above the 20-day and 200-day SMAs. This suggests that buyers continue to wield some strength in the broader time horizon.
However, the Dollar Index being below the 100-day SMA may hint at intermediate barriers for bullish movements. Hence, while the broader trend might still be inclined toward buyers, the short-term outlook presents a battle for control between bulls and bears.
US Dollar FAQs
What is the US Dollar?
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.
How do the decisions of the Federal Reserve impact the US Dollar?
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.
What is Quantitative Easing and how does it influence the US Dollar?
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.
What is Quantitative Tightening and how does it influence the 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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