- The US dollar is under pressure as markets are still divided over the size of the Fed rate cut.
- Traders will remain on the sidelines until the decision is announced, followed by Fed Chair Powell’s press conference.
- The US Dollar Index is retreating on Wednesday after a small rebound the previous day.
The US Dollar (USD) is retreating and trading below 101.00, according to the US Dollar Index (DXY), ahead of the US Federal Reserve (Fed) interest rate decision on Wednesday. The DXY is under pressure near yearly lows and faces a key moment, with the Federal Open Market Committee (FOMC) set to answer how much the Fed needs to cut interest rates. In addition to Fed Chair Jerome Powell’s speech and press conference, the focus will be on the Summary of Economic Projections (SEP), or the Fed’s dot plot or Phillips curve, where each FOMC member has the opportunity to communicate where they see the Fed’s policy rate moving in the near future. The number of projected rate cuts could be vital in guiding markets in their expectations.
On the economic data front, some relatively light data points aren’t set to move the needle ahead of the Fed’s decision on Wednesday. Markets are still split between a 25- or 50-basis-point rate cut, so Fed Chair Jerome Powell’s guidance during his speech could shed a completely different light on the matter and could result in a knee-jerk reaction.
Market drivers: It will be painful
- Wednesday’s main set of economic data will be released at 12:30 GMT, with monthly Building Permits and Housing Starts data. Monthly Building Permits are expected to rise to 1.410 million in August from 1.406 million in July. Monthly Housing Starts are also expected to rise, with 1.310 million expected in August versus 1.238 million previously.
- At 18:00 GMT, the Fed will release its interest rate decision, Monetary Policy Statement and Summary of Economic Projections.
- At 18:30 GMT, Fed Chairman Jerome Powell will take the stand with a statement followed by a question-and-answer session.
- Asian stocks are up on Wednesday, while European stocks are marginally in the red. US futures are flat ahead of the Fed rate decision.
- The CME Fedwatch tool shows that it will be a very close call this Wednesday with a 25 basis point (bps) rate cut probability at 37.0%. Meanwhile, the odds of a 50 bps cut are at 63%. For the November 7 meeting, another 25 bps cut (if this Wednesday is a 25 bps cut) is expected with a 22.4% probability, while there is a 51.6% chance of rates being 75 bps (25 bps + 50 bps) and a 26.0% chance of rates being 100 (25 bps + 75 bps) basis points lower compared to current levels.
- The benchmark 10-year U.S. rate is trading at 3.66%, rebounding from a 15-month low of 3.60%.
Economic indicator
Fed interest rate decision
He Federal Reserve Board of Governors The Fed announces the interbank interest rate. This rate affects a range of interest rates set by commercial banks, building societies and other institutions for their own borrowers and depositors. Any change in the trend noted in the statement accompanying the interest rate decision will affect dollar volatility. If the Fed is firm on the economy’s inflationary outlook and raises rates, this is bullish for the dollar, while an outlook for reduced inflationary pressures will be bearish for the dollar.
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Technical Analysis of the DXY Dollar Index: Stagnant or Broken?
The US Dollar Index (DXY) is set to either stay range-bound for a while longer or finally break out of this rut ​​it has been in for almost a month. The Fed rate decision on Wednesday is the catalyst markets are looking for to finally break out of a consolidation phase. With conviction divided on the size of the rate cut, the risk is that a knee-jerk reaction could end with the DXY opening on Thursday still in the same tight range between 100.62 and 101.90.
The top level of the recent range is 101.90. Further up, a sharp 1.2% rise would be needed to take the index to 103.18, with the 55-day simple moving average (SMA) at 102.82 in the way. The next leg up is very nebulous, with the 200-day SMA at 103.80 and the 100-day SMA at 103.84, just short of the large round level at 104.00.
On the downside, 100.62 (the low of December 28, 2023) remains strong and has already caused the DXY to bounce twice in the past few weeks. If broken, the low of July 14, 2023, at 99.58, will be the next level to watch. If that level gives way, early 2023 levels are near 97.73.
US Dollar Index: Daily Chart
US Dollar FAQs
The United States 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 in circulation alongside local banknotes. As of 2022, it is the most traded currency in the world, accounting for over 88% of all global foreign exchange transactions, equivalent to an average of $6.6 trillion in daily transactions. Following World War II, the USD took over from the British Pound as the world’s reserve currency.
The single most important factor influencing the value of the US dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and to promote full employment. Its main tool for achieving these two goals is to adjust interest rates. When prices rise too quickly and inflation exceeds the Fed’s 2% target, the Fed raises rates, which helps the dollar. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the 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 jammed financial system. It is an unconventional policy measure used when credit has dried up because banks are not lending to each other (for 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 of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE typically leads to a weakening of 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 of maturing securities in new purchases. It is generally positive for the US dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
