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US Dollar turns bleak going into the Fed rate decision while markets have tons of questions on president-elect Trump and the Fed

  • The US Dollar pares gains with markets focusing on the Fed rate decision later this Thursday. 
  • Fed Chairman Powell is not expected to answer questions on politics, markets will be keen to see his reaction on President-elect Trump.
  • The US Dollar index dips lower into 104-territory and is unable to hold Wednesday’s gains.

The US Dollar (USD) keeps seeing selling pressure throughout the trading day on Thursday, with profit-taking pressure persisting after the Greenback had its best performance in years in reaction to Donald Trump winning the US presidential election. Traders’ attention shifts now to the Federal Reserve (Fed), which is set to cut interest rates by 25 basis points (bps) this Thursday. With the rate decision fully priced in, the focus will be on Fed Chairman Jerome Powell, specifically on the inflation and rate outlook for December and beyond in light of the US presidential election outcome. 

The US economic calendar is picking up in weight, with the weekly Jobless Claims set to be released. The quarterly Nonfarm Productivity and Unit Labor Costs will add some weight to the price reaction as well. Right at the end of the trading day, the Fed will release its rate decision, followed by Fed Chairman Powell’s press conference shortly thereafter. 

Daily digest market movers: A bit of everything

  • The US economic calendar kicked off at 13:30 GMT with a string of data:
    • The Initial Jobless Claims for the week ending on November 1 came in at 221,000, in line with expectations. Last week’s numbers got revised up to 218,000, coming from 216,000.
    • The preliminary reading for the third quarter Nonfarm Productivity came in at 2.2%, just shy of the 2.3% estimate. The previous quarter’s number got revised down to 2.1%, coming from 2.5% previously. 
    • The preliminary third quarter Unit Labor Cost came in much higher on all fronts. The current number came in at 1.9%, beating the 0.5% consensus. The previous quarter number got revised up sharply to 2.4%, from 0.4%.
  • At 19:00 GMT, the Fed is publishing its interest rate decision. Expectations are for a rate cut to 4.75% from 5%.
  • At 19:30 GMT, Fed Chairman Jerome Powell will take the stage to deliver a speech and comments on the recent rate decision. During the press conference, there are bound to be questions on the Fed’s stance in light of the recent Trump presidential election win. 
  • Equities are looking sluggish this Thursday for the US. Winners were the losers from Wednesday, with European and Chinese equities set to close off this Thursday with upbeat performances. 
  • The CME FedWatch Tool shows a 70.8% chance that the interest rate will be 50 basis points (bps) lower than the current level in the Federal Reserve’s December 18 meeting. Assuming a 25 bps cut in November, a new 25 bps cut could be expected in December. A smaller 28.4% chance is present for the interest rate to be 25 bps lower than the current level in December, implying no cut that month after trimming rates in November.. 
  • The US 10-year benchmark rate trades at 4.39%, settling down a bit after hitting 4.47% earlier.  

US Dollar Index Technical Analysis: Powell’s body language on Trump questions will reveal a lot

The US Dollar Index (DXY) has played its hand and has made markets clear what the famous Trump trade will mean for markets when US President-elect Donald Trump takes office on January 20, 2025. While the Fed is set to continue its interest rate-cut cycle, a tug-of-war might occur. Traders could expect the second phase of the Trump trade in January with a stronger Greenback, while the Fed rate-cutting cycle suggests a softer Greenback. Refrain from expecting this to be a straight line-up for the DXY and rather expect to see substantial easing first before Trump takes office. 

The first upper level is 105.53 (April 11 high), a very firm cap resistance, with 105.89 (May 2 high) just above. Once that is broken, 106.52, the high of April and a double top, will be the last level standing before starting to talk about 107.00.

On the downside, last week’s peak at 104.63 looks to be the first pivotal support nearby. Should the fade become bigger, the round level of 104.00 and the 200-day Simple Moving Average (SMA) at 103.85 should refrain from sending the DXY any lower. 

US Dollar Index: Daily Chart

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.