US Dollar trades subdued as Fed rate-cut decision looms

• The US Dollar is under pressure as markets are still divided over the size of the Fed rate cut. 
• Traders will sit on their hands until the decision is out, followed by the Fed’s Chair Powell press conference. 
• The US Dollar Index retraces on Wednesday after the prior day’s small bounce. 

The US Dollar (USD) retraces and trades below 101.00, as measured by the US Dollar Index (DXY), ahead of the US Federal Reserve (Fed) interest rate decision on Wednesday. The DXY is under pressure near the yearly lows and faces a key moment, with the Federal Open Market Committee (FOMC) ready to answer how much the Fed needs to cut interest rates. Besides Fed Chairman Jerome Powell’s speech and press conference, the focus will be on the Summary of Economic Projections (SEP), or the Fed’s Dot Plot or Philips curve, where every FOMC member gets a chance to communicate where they see the Fed policy rate move to in the near future. The number of projected rate cuts could be vital in guiding markets in their expectations. 

On the economic data front, some relatively light data points are not set to move the needle ahead of the Fed decision on Wednesday. Markets are still split between a 25 or 50 basis points interest rate cut, so guidance from Fed Chairman Jerome Powell during his speech could shed a completely different light on the matter and might result in a knee-jerk reaction. 

Daily digest market movers: It will be painful 

• The main set of economic data on Wednesday will be out at 12:30 GMT, with monthly Building Permits and Housing Starts data. Monthly Building Permits are expected to jump to 1.410 million in August from 1.406 million in July. Monthly Housing Starts are also expected to head higher, with 1.310 million expected in August against 1.238 million previously. 
• At 18:00 GMT, the Fed will release its Interest Rate Decision, the Monetary Policy Statement, and the Summary of Economic Projections. 
• At 18:30 GMT, Fed Chairman Jerome Powell will take the stage with a statement followed by a Q&A session. 
• Asian equities are doing fine on Wednesday, while European equities are marginally in the red. US Futures are flat ahead of the Fed rate decision. 
• The CME Fedwatch Tool shows it will be a very close call this Wednesday with a 25 basis points (bps) interest rate cut probability at 37.0%. Meanwhile, the chances of a 50 bps cut are at 63%. For the November 7 meeting, another 25 bps cut (if this Wednesday is a 25 bps cut) is expected by 22.4%, while there is a 51.6% chance that rates will be 75 bps (25 bps + 50 bps) and a 26.0% probability of rates being 100 (25 bps + 75 bps) basis points lower compared to current levels. 
• The US 10-year benchmark rate trades at 3.66%, bounces off the 15-month low of 3.60%. 

US Dollar Index Technical Analysis: Stuck or broken?

The US Dollar Index (DXY) is set to either stick to its range for quite a time longer or finally break out of this rud it has been for nearly a month. The Fed rate decision on Wednesday is the catalyst that markets seek to finally break out of a certain consolidation phase. With the split conviction on the size of the interest rate cut, the risk is that a knee-jerk reaction could end up with the DXY opening Thursday still in the same tight range between 100.62 and 101.90. 

The upper level of the recent range is 101.90. Further up, a steep 1.2% uprising would be needed to get the index to 103.18, with the 55-day Simple Moving Average (SMA) at 102.82 on the way.  The next tranche up is very misty, with the 200-day SMA at 103.80 and the 100-day SMA at 103.84, just ahead of the big 104.00 round level. 

On the downside, 100.62 (the low from December 28, 2023) holds strong and has already made the DXY rebound two times in recent weeks.  Should it break, 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