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- US Dollar back in the green in mixed week ahead of Fed
US Dollar back in the green in mixed week ahead of Fed
- The US Dollar pops back above a crucial level ahead of Fed meeting.
- Traders were surprised by upbeat JOLTS numbers, with job openings still at elevated levels.
- The US Dollar Index is hovering around the 200-day SMA and remains stuck in its pattern.
The US Dollar (USD) is facing its first main event of 2024 with the US Federal Reserve rate decision for January. All eyes will be on the Federal Reserve Chairman Jerome Powell and what he will deliver to the markets. Although no rate changes are expected, the tone of the statement from Powell can still be either hawkish or dovish and could dampen hopes for a quick rate cut further with a repricing for a (stronger) US Dollar at hand.
On the economic front, a perfect menu lies ahead of the main event this Wednesday evening. Traders will get the chance to dig into the privately compiled ADP Employment Change report ahead of the official US jobs report on Friday. The Chicago Purchasing Managers’ Index for January is due to be released as well, with traders seeking confirmation of the number jumping out of contraction territory (over 50), like the PMI prints last week. Such a move would help confirm a recovery and soft landing.
Daily digest market movers: Tensions build up
- The Mortgage Bankers Association (MBA) is set to release its weekly number of mortgage applications near 12:00 GMT. Previous was at 3.7%.
- At 13:15 the ADP Employment Change report is expected to be released. The previous figure was at 164,000 with 145,000 expected.
- Near 13:30 the Employment Index for the fourth quarter is to be released. The previous figure was 1.1% with 1.0% expected for now.
- At 14:45 the Chicago Purchase Managers Index (PMI) for January will be released. The prior figure reflected contraction at 46.9, with 48 expected this time. Any number above 50 would mean growth.
- The Federal Open Market Committee (FOMC) is set to release its first rate decision for 2024:
- At 19:00 GMT the Fed will release its rate decision with a joint written statement.
- Around 19:30 US Fed Chairman Jerome Powell will take the stage and further go into details on how the Fed sees current conditions in the US.
- Although a rate change is not expected, the meeting could still hold a hawkish or dovish undertone which could send the Greenback respectively higher or lower in the US Dollar Index.
- Equity markets are lower after missed earnings from AMD and Alphabet. Add in there the miss on expectations for the Chinese Manufacturing PMI, and risk appetite looks to be very mild this Wednesday.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 97.9% possibility for an unchanged rate decision this Wednesday evening, with a slim 2.1% chance of a cut.
- The benchmark 10-year US Treasury Note trades near 4.01% and is at the lowest level for this week ahead of the Fed rate decision.
US Dollar Index Technical Analysis: The moment we have all been waiting for
The US Dollar Index (DXY) might find its catalyst this Wednesday. For nearly two weeks now it has been unable to trade away from both the 55-day (103.02) and the 200-day (103.54) Simple Moving Averages despite several false breaks and both MAs getting all chopped up.
Although the Fed meeting this Wednesday is unlikely to usher in any rate changes, the outcome could still favor the Greenback if Powell delivers a hawkish statement to the markets. Such a move would see market expectations pushback on when the Fed will make its first rate cut.
In such a scenario the DXY will be able to break away from the 200-day SMA. Look for 104.36 as the first resistance level to the upside, in the form of the 100-day SMA. If that gets breached as well, nothing will hold the DXY back from heading to either 105.88 or 107.20 – the high of September.
On the other hand, with the repetition of another break above the 200-day SMA, yet again, a bull trap could also form if prices then start sliding below the same moving average. This would see a long squeeze, with US Dollar bulls being forced to start selling around 103.10 at the 55-day SMA. Once below that, the downturn would be open to 102.00.
Fed FAQs
What does the Federal Reserve do, how does it impact the US Dollar?
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.
How often does the Fed hold monetary policy meetings?
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.
What is Quantitative Easing (QE) and how does it impact USD?
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.
What is Quantitative Tightening (QT) and how does it impact 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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