The US Dollar (USD) trades back at levels where it was before the US Federal Reserve (Fed) meeting took place, and is even heading higher just ahead of the US trading session. Traders quickly pared back initial losses on Wednesday after Fed Chairman Jerome Powell said that a 50-basis-point (bps) rate cut would not be the new normal, although the Greenback is retreating further this Thursday. Going forward, it looks like economic data ahead of each rate decision will determine the size of the cut, if any, an assumption that was perceived as rather hawkish by markets.
On the economic data front, traders see already chances for another 50-basis-point rate cut diminish with the economic data points for this Thursday coming in stronger. The weekly Jobless Claims come in lower at 219,000 against the expected 230,000. The Philadelphia Manufacturing Index ties back up with growth at 1.7 againsth the expected contraction by -1 expected.
The US Dollar Index (DXY) is back in its range after a very brief field trip lower, outside of that bandwidth that is determining the DXY moves for the past few weeks. With this Fed rate cut and projections for this year, a gradual further easing of the Greenback should play out. Expect pressure to build up again on the lower end of the bandwidth, which could be snapped if economic data deteriorates and leads the Fed towards another 50-basis-point rate cut in November.
The upper level of the recent range remains 101.90. Further up, the index could go to 103.18, with the 55-day Simple Moving Average (SMA) at 102.74 on the way. The next tranche up is very misty, with the 200-day SMA and the 100-day SMA at 103.79, just ahead of the big 104.00 round level.
On the downside, 100.62 (the low from December 28, 2023) has been broken overnight, though was unable to get a daily close below it. Should it happen, the low from July 14, 2023, at 99.58, will be the next level to look out for. If that level gives way, early levels from 2023 are coming in near 97.73.
US Dollar Index: Daily Chart
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.
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