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- US Dollar facing Powell as Fed is expected to hold steady
US Dollar facing Powell as Fed is expected to hold steady
- The US Dollar trades in the green this morning in a safe haven flight.
- Traders are on edge to hear from US Fed chairman Jerome Powell.
- The US Dollar Index steadies above 105 after a brief breakdown on Tuesday.
The US Dollar (USD) is facing a moment of truth with US Federal Reserve (Fed) Chairman Jerome Powell taking the stage this Wednesday. Although no hikes are expected, the stakes are very high. Not only did recent data show an uptick in economic activity with the labor market still holding strong in the US, inflationary pressures are starting to gain momentum yet again.
As if Powell does not have a challenging enough job, the current inflationary pressure is coming from the energy market. The energy sector is a corner of the inflation basket where the Fed has no control, except by triggering a recession that would kill any additional demand for energy from a business perspective. A hawkish pause needs to be delivered as markets will want to see if the Fed is in a better position to deliver it, following the appalling performance from European Central Bank (ECB) Chairman Christine Lagarde last week.
Daily digest: US Dollar facing moment of truth for its rally
- Thai Baht drops 1% against the Greenback in Asian trading.
- Expect to hear a needle drop in the markets during the European session and up until 18:00 GMT. The Fed will communicate first its interest rate decision, which is expected to remain unchanged at 5.5%. A joint statement will be available as well at the time of the rate communication.
- In the brief, the dot-plot (Phillips curve) will be communicated as well. Every Fed member who was a voter at this September meeting gets his chance to pencil in where rates will be in the coming months and years. This way a consensus view can be made on how high the Fed thinks it will need to go and for how long rates will remain unchanged.
- Thirty minutes later, at 18:30 GMT, Jerome Powell will take the stage and give his insights on why the Fed hiked or paused. Here will be the crucial moment if Powell is able to deliver that expected hawkish message to the markets that the Fed will not relent on controlling inflation.
- Equities are in the red again this Wednesday as there is no escaping the negative mood stock markets are in this week. At the moment the Hang Seng Index and the Shanghai CSI 300 index are both negative on their year-to-date performance, erasing any gains for the whole of 2023.
- The CME Group FedWatch Tool shows that markets are pricing in a 99% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September. Traders though will need to watch out for any hawkish rhetoric from Powell as inflation has been ticking up recently.
- The benchmark 10-year US Treasury yield trades at 4.36% and peaked on Tuesday. Yields are ticking up again after earlier a flight to safety triggered the opposite with bond prices rising.
US Dollar Index technical analysis: Back to square one
THe US Dollar was facing some selling pressure this week with market participants unwinding some of their US Dollar long positions and others trying to pre-position for the main event this Wednesday. The fact that the US Dollar Index (DXY) was able to stay above 105, even with a brief breakdown, points to the importance of the level.
Expect a binary outcome with possibly the DXY making new yearly highs if Powell succeeds in delivering a hawkish message. If markets perceive the message as dovish, the summer rally of the Greenback could come to an end by going into Thursday.
The US Dollar Index (DXY) has edged up, reaching 105.41. This is just a sigh away from the 2023 high near 105.88. Should the DXY be able to close above there for the week, expect the US Dollar to go even stronger in the medium turn.
On the downside, the 104.44 level seen on August 25 kept the Index supported on Monday, halting the DXY from selling off any further. Should the uptick that started on September 12 reverse and 104.44 gives way, a substantial downturn could take place to 103.04, where the 200-day Simple Moving Average (SMA) comes into play for support.
US Dollar FAQs
What is the US Dollar?
The US 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 found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
How do the decisions of the Federal Reserve impact the US Dollar?
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
What is Quantitative Easing and how does it influence the US 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 stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the 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 in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
What is Quantitative Tightening and how does it influence 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 from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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