US Dollar sideways ahead of Fed’s rate decision and Powell’s speech
- The US Dollar retreats a touch ahead of the Fed rate decision
- Traders brace for an expected firm pushback on rate cuts from the Fed.
- The US Dollar Index hovers around 104 with 105 targeted if the Fed delivers hawkish message.
The US Dollar (USD) is steady to sideways against all major G20 currencies. Traders are bracing for the last US Federal Reserve meeting of 2023. Although another pause in the monetary policy rate looks to be a given, the guiding speech from US Fed Chairman Jerome Powell will be the event that might move the needle. Another factor could be the Fed’s Dot Plot, forecasting the trajectory of interest rates based on the consensus views of Fed members.
On the economic front, all eyes will be on 19:00 GMT for the official rate announcement and initial guidance, followed by the press conference with Jerome Powell at 19:30 GMT. Meanwhile the US Producer Price Index number were overall in line in this final reading and triggered no real substantial changes.
Daily digest: PPI numbers trigger mild Greenback
- Near 12:00 GMT the Mortgage Bankers Association (MBA) has released the Mortgage Applications for last week. Previous number was 2.8% and now came out at 7.4%.
- The Producer Price Metrics measures the inflation on the production side for manufacturers and companies. Any upticks in the Producer Price metrics will be passed on further down the line to the clients in the stores and filter into Consumer Price Index numbers:
- Monthly Headline Producer Price Index went from -0.5% to 0.0%.
- Yearly Headline Producer Price Index went from 1.3% to 0.9%.
- Monthly Core Producer Price Index number remained unchanged at 0%.
- Yearly Core Producer Price Index to decline from 2.4% to 2%.
- At the stroke of 19:00 the Fed will release its monetary policy, expected to remain unchanged at 5.5%. A statement will be released as well, which will have the Fed’s Dot Plot projections.
- At 19:30 GMT, US Fed Chairman Jerome Powell will take the stage and give guidance to the markets on the stance of the Fed.
- Equites are holding steady in European trading with minor changes for the day. US futures are mildly in the green as well ahead of the main event this Wednesday. Chinese equities were in the ropes again with the Hong Kong Hang Seng down over 1% at its closing bell. With markets still doubting between risk-on or risk-off, the steady and sideways DXY moves confirms that traders are awaiting further elements.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 98.2% chance that the Federal Reserve will keep interest rates unchanged this Wednesday.
- The benchmark 10-year US Treasury Note trades near 4.19%, in a whipsaw pattern where the floor around 4% for now looks to be holding the pressure for now.
US Dollar Index technical analysis: Technical breakout due
The US Dollar is sending very mixed signals on its US Dollar Index (DXY) daily chart. The fact that the daily price action is showing lower highs with support holding steady along that 200-day Simple Moving Average (SMA) at 103.55, points to a bearish pressure building. This makes it very clear that two scenarios are on the table for the outcome in the DXY this Wednesday.
The DXY could snap the declining tops and print new highs for not only the past few days, but for the past week. This means that 104.26 needs to break in order to deliver a bullish signal and see the Greenback advance against several major different currencies. In a case where the Fed and Powell deliver a very hawkish message to the markets, with cuts being repriced to the second or third quarter of this year, DXY could soar towards 105.
To the downside, the 200-day SMA could snap if the Fed drops the ball. Markets are expecting cuts, and should the Dot Plots confirm that idea, while Powell would say that cuts are not foreseen in an attempt to remain hawkish. Expect traders to disregard his comments, buy into US bonds, with US yields dropping again and seeing the Greenback in its turn nosediving towards 102.50, the low of November.
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.