- The USD sees continued rise ahead of the FOMC meeting, extending its third consecutive day of gains.
- The US economic outlook remains strong and investors await new economic forecasts from the FOMC.
- Markets anticipate a hawkish tone in Wednesday’s Fed decision.
On Tuesday, the US Dollar Index (DXY) showed an uptrend towards the 105.36 area. The session will not provide any highlights as the guns are pointed at Wednesday’s session.
The two-day meeting of the Federal Open Market Committee (FOMC), which began on Tuesday and will end on Wednesday, is being watched by market analysts. Any change in the outlook for interest rates or in the guidance of members of the Federal Reserve (Fed) is bound to cause movements in the market. The result of the famous dot plot will also be closely watched.
Daily moves and market drivers: DXY gains more ground on a quiet Tuesday, all attention is on the FOMC
- Updated dot plots will provide valuable information. A single change from three interest rate cuts to two by a Fed policymaker could raise the 2024 median from 4.625% to 4.875%.
- Markets expect an apparent ‘hawkish pause’ from the Fed, keeping rates at 5.5%.
- Consequently, the odds of a cut in September appear to be about 50:50, and the odds of a cut in November sit at around 85%.
- The US will also release inflation data on Wednesday. May’s core Consumer Price Index (CPI) is expected to slow slightly to 3.5% year-on-year, while headline inflation is anticipated to remain stable at 3.4%.
DXY Technical Analysis: Wednesday’s Fundamentals Will Shake Up the Trajectory
The indicators on the daily chart remain strong, with both the RSI and MACD jumping into positive territory. Furthermore, the Index recovered above the 20-day, 100-day, and 200-day SMAs, improving the near-term outlook.
Wednesday’s fundamental stimulus will dictate the pace of the coming sessions, and markets should watch the 106.00 area in case the DXY faces bullish pressure. On the downside, the 104.50 area remains strong support.
The U.S. dollar
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. According to 2022 data, it is the most traded currency in the world, with more than 88% of all global currency exchange operations, equivalent to an average of $6.6 trillion in daily transactions. After World War II, the USD took over from the pound sterling 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: achieve price stability (control inflation) and promote full employment. Your main tool to achieve these two objectives is to adjust interest rates. When prices rise too quickly and inflation exceeds the 2% target set by the Fed, the Fed raises rates, which favors the price of 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 into a clogged financial system. This is an unconventional policy measure used when credit has dried up because banks do not lend to each other (for fear of counterparty default). It is a last resort when a simple lowering of 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 usually leads to a weakening of the US Dollar.
Quantitative tightening (QT) is the reverse process by which the Federal Reserve stops purchasing bonds from financial institutions and does not reinvest the principal of maturing portfolio securities in new purchases. It is usually 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.
