US Dollar reclaims ground after Fed decision
- US Dollar exhibited strength after market participants took in the Fed's decision.
- Despite showing signs of disinflation, the US economy remains resilient, which keeps the Fed data-dependent.
- The odds of a cut in September declined after the decision but remain high.
The US Dollar, tracked by the DXY index, lost ground on Wednesday before the Federal Reserve’s meeting but managed to clear losses after the announcement. Even though markets are strongly hinting at a rate cut in September, the robust disposition of the US economy may encourage Jerome Powell to request additional data before reducing rates, which could stimulate further demand for the USD.
Signs of disinflation are beginning to permeate the US economic landscape, affirming the market's belief in a forthcoming rate cut in September. However, the larger economy continues to depict strength, as underscored by last week's data surprises like the Q2 Gross Domestic Product (GDP) and July S&P Global PMIs.
Daily digest market movers: USD gains after FOMC's decision, Powell’s presser
- The Federal Reserve has decided to hold the target range for the federal funds rate at 5.25% to 5.5%.
- The statement mentioned that economic activity continues to expand albeit with moderated job gains and a slight increase in unemployment.
- The bank stated that inflation has eased, but that it remains elevated.
- Markets await Powell’s presser for further guidance
- The odds of a September cut remain high, but they will depend on incoming data. Hence Weekly Jobless Claims and Nonfarm Payrolls at the end of the week will be closely relied on for direction.
DXY technical outlook: Neutral to bearish positioning forms as index drops below key SMAs
Despite a promising weekly start, the DXY index is experiencing a downturn, falling below both the 20-day and 200-day Simple Moving Averages (SMA). These two indicators seem to be converging toward a bearish crossover at around 104.00, which could add more selling pressure.
The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), although not fully recovered, demonstrate a gradual return to neutral territory, but if they jump to positive terrain, the DXY is poised for further downside. The index continues to find support at the 104.15 and 104.00 levels, while resistance is observed at the 104.50 and 105.00 levels.
Fed FAQs
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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