- The FOMC meeting ended with a 50bp interest rate cut to the 4.75%-5.00% range.
- The dot plot suggests a gradual easing cycle that hints at three cuts in 2024.
- Chairman Powell emphasized during his press conference that the Fed is in no rush.
The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, is flat near 100.70 on Thursday as the market digests the 50 basis point (bp) rate cut by the Federal Reserve (Fed). The market overreacted to the news, intensifying expectations for further easing despite the Fed’s efforts to signal a gradual easing cycle. On Thursday, the US published solid initial jobless claims figures, which halted the USD’s decline.
The US economy is experiencing mixed signals with signs of both slowdown and resilience. While some economic indicators suggest a slowdown, others indicate that activity remains robust. The Fed has indicated that the pace of future interest rate adjustments will be guided by incoming economic data, so the DXY index will be sensitive to incoming reports.
Market drivers: US dollar falls, market anticipates further easing
- The FOMC cut rates by 50 bps on Wednesday, though the dot plot suggests a more gradual easing cycle ahead.
- Despite the Fed’s efforts to counter market expectations of easing, these have intensified.
- After initially lowering expectations following the decision, the market is now pricing in an additional 75 basis points of rate cuts by the end of the year.
- The market is anticipating about 250 basis points of additional cuts over the next year, which would take the federal funds rate significantly below the neutral level.
- The Fed released updated macroeconomic forecasts, showing that growth remains robust in the third quarter.
- On the data front, US citizens filing for first-time unemployment insurance benefits reached 219K in the week ending September 14, below expectations and the previous weekly figure.
- The seasonally adjusted insured unemployment rate was 1.2%, and the 4-week moving average was 227.
DXY Technical Outlook: DXY under bearish momentum, should reclaim 101.00
The DXY index indicators remain bearish, having lost the 20-day simple moving average (SMA). Selling traction is increasing with the Relative Strength Index (RSI) trending lower below 50. The Moving Average Convergence/Divergence (MACD) indicator is presenting lower green bars, indicating a shift towards the bearish trend.
Supports are found at 100.50, 100.30 and 100.00, while resistance levels are found at 101.00, 101.30 and 101.60.
Central banks
Central banks have a key mandate which is to ensure price stability in a country or region. Economies constantly face inflation or deflation when prices of certain goods and services fluctuate. A constant rise in the prices of the same goods means inflation, a constant fall in the prices of the same goods means deflation. It is the job of the central bank to keep demand in line by adjusting its interest rate. For larger central banks, such as the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has an important tool to raise or lower inflation: changing its benchmark interest rate. At pre-announced times, the central bank will issue a statement with its benchmark interest rate and give additional reasons for why it is holding or changing it (cutting or raising it). Local banks will adjust their savings and lending rates accordingly, which in turn will make it harder or easier for citizens to earn profits on their savings or for companies to borrow and invest in their businesses. When the central bank substantially raises interest rates, it is called monetary tightening. When it lowers its benchmark rate, it is called monetary easing.
A central bank is usually politically independent. Members of the central bank’s policy council go through a series of panels and hearings before being appointed to a position on the policy council. Each member of that council usually has a particular conviction about how the central bank should control inflation and the resulting monetary policy. Members who want very loose monetary policy, with low rates and cheap loans, to substantially boost the economy, while being content with inflation just above 2%, are called “doves.” Members who prefer higher rates to reward saving and want to keep inflation under control at all times are called “hawks,” and they will not rest until inflation is at or just below 2%.
Typically, there is a chairman who chairs each meeting, has to build consensus between hawks or doves, and has the final say when votes must be split to avoid a 50-50 tie on whether current policy should be tightened. The chairman will make speeches, which can often be followed live, in which he or she will communicate the current monetary stance and outlook. A central bank will try to push its monetary policy forward without causing wild swings in rates, stocks, or its currency. All central bank members will channel their stance to the markets before a monetary policy meeting. A few days before a monetary policy meeting is held and until the new policy has been communicated, members are prohibited from speaking publicly. This is called a silent period.
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.
