US Dollar advances as the Fed decision looms
- US Dollar is gaining traction, DXY index surged to 106.70.
- The two-day Fed meeting ends on Wednesday with a monetary policy decision.
- Mid-tier economic figures from the US came in mixed.
- US Treasury yields retreat, which may limit the USD’s momentum.
The US Dollar (USD) is up on Tuesday, with the DXY index rising to 106.70 on the back of a cautious market mood ahead of the Federal Reserve (Fed) Interest Rate Decision on Wednesday. In addition, the US reported strong Housing and Confidence data, while Chicago’s PMI from October came in lower than expected.
In defiance of the Federal Reserve’s (Fed) tightening measures, the United States economy showed remarkable resilience, which allowed the Greenback to gain traction. Despite this, the possibility of a 25-basis-point hike in December, as per the CME FedWatch Tool, continues to be low, limiting any upward movement of the USD. That being said, the policy statement and Fed Chair Jerome Powell’s words may provide further clues on forward guidance for investors to continue modeling their expectations for the next meeting.
Daily Digest Market Movers: US Dollar gained traction amid positive Housing and Confidence data, eyes on Fed
- The US DXY Index jumped to 106.70, after bottoming at a daily low below 106.00.
- The US Conference Board Consumer Confidence Index from October beat expectations, coming in at 102.6 vs the 100.5 expected.
- The S&P Dow Jones Indices reported that the S&P/Case-Shiller Home Price from August exceeded expectations. It came in at 2.2% YoY vs the expected 1.6% and increased in relation to its last reading of 0.2%.
- On the negative side, the Chicago PMI from October came in at 44, below the expected 45 consensus and declined from its previous reading of 44.1.
- Meanwhile, US government bond yields are mixed with the 2, 5 and 10-year yields standing at 5.07%,4.81% and 4.86%, respectively, which could limit the USD’s momentum.
- For Wednesday, according to the CME FedWatch Tool, a pause in November is nearly priced in, while the odds of a 25-basis-point hike in December are still low near 20%.
Technical Analysis: US Dollar Index jumps back above 20-day SMA, momentum still limited
According to the daily chart, the technical outlook for the DXY Index remains neutral to bearish as the bulls show signs of exhaustion. The Relative Strength Index (RSI) points toward a potential reversal, as its positive slope above the midline weakens, while the Moving Average Convergence Divergence (MACD) histogram presents red bars.
As long as the index remains above the 20, 100 and 200-day Simple Moving Averages (SMAs), the outlook on the broader scale will favour bulls, but buyers will probably have a hard time defending the 20-day SMA as momentum weakens.
Supports: 106.30 (20-day SMA), 106.00, 105.70.
Resistances: 106.80, 107.00, 107.30.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.