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- US Dollar trades neutrally in anticipation of Fed's final 2023 meeting
US Dollar trades neutrally in anticipation of Fed's final 2023 meeting
- The DXY Index trades flat at 103.80.
- Investors await Fed decision alongside fresh economic and interest rate projections.
- November’s PPI from the US came in lower than expected.
The US Dollar (USD) Index holds steady around 103.8 on Wednesday, consolidating its position as investors weigh the data on November's Headline and Core Producer Price Index (PPI), which came in lower than expected. At the backdrop is the anticipation ahead of the Federal Reserve's (Fed) final meeting of 2023, a factor bearing heavily on the current market sentiment as it may shape the pace of the markets for the short term.
As the US economy confronts cooling inflation and a resilient labor market, the Fed presents a cautious stance, not dismissing prospects of further tightening. Despite market speculation asserting a dovish orientation, the Fed still hasn’t declared victory on inflation, and this ambiguity keeps investors anxiously anticipating the Fed's Dot Plot projection, crucial for determining potential interest rate cuts in 2024.
Daily Market Movers: US Dollar holds steady before Federal Reserve decision despite soft PPI figures
- The US Dollar is neutral as the market remains anticipative ahead of the Federal Reserve's last hike of 2023.
- The US Producer Price Index (PPI) showed a yearly ascent of 0.9% in November, a slowdown from its 1.2% climb in October.
- Furthermore, the yearly Core PPI rose by a marginal 2%, lower than October's figures and the market’s forecast of 2.4% and 2.2%, respectively.
- US bond yields are on a downward slope, with the 2-year, 5-year, and 10-year rates reported at 4.66%, 4.17%, and 4.15%,, respectively.
- No rate hikes are expected for today’s meeting, according to the CME FedWatch Tool. Expectations are forming around potential rate cuts for May 2024.
- The latest interest rate Dot Plot chart from the Federal Reserve indicates a median projection that places the Federal Funds Rate at 5.1% by the conclusion of 2024. This means a modest 25-basis-point rate reduction over the course of next year.
Technical Analysis: DXY index faces consolidation phase with a bullish tilt
The indicators on the daily chart reflect a somewhat neutral yet cautiously optimistic stance. The Relative Strength Index (RSI) is flat and currently in negative territory, and yet the bears are taking a breather, which underscores that selling pressure is easing.
The Moving Average Convergence Divergence (MACD), which mirrors similar sentiment, is flat too but with green bars suggesting a minor bullish bias in the short term.
In terms of Simple Moving Averages (SMAs), the price is oscillating above the 20-day SMA and the 200-day SMA, reflecting that buyer momentum is holding resilient, especially in the larger time frames, with some degree of dominance over the sellers.
However, the asset is trading below the 100-day SMA, indicating that the bullish momentum is somewhat restrained and could face resistance. Also, traders should eye a potential bearish crossover between the 100-day and 200-day SMA, which could shift the balance toward sellers.
Support levels: 103.70 (20-day SMA), 103.50, 103.30.
Resistance levels: 104.50 (100-day SMA), 104.50, 104.70.
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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