Forex Today: US Dollar awaits Fed policy decisions, dot plot

Here is what you need to know on Wednesday, March 20:

The US Dollar (USD) holds steady against its major rivals early Wednesday, with the USD Index (DXY) fluctuating in a tight channel below 104.00 after closing the previous four trading days in positive territory. The Federal Reserve (Fed) will announce monetary policy decisions and release the revised Summary of Economic Projections, the so-called dot plot, at 18:00 GMT. Fed Chairman Jerome Powell speak on the policy and economic outlook and respond to questions in a press conference starting at 18:30 GMT.

US Dollar price this week

The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the strongest against the Japanese Yen.

USD   0.14% 0.13% 0.25% 0.39% 1.67% 0.71% 0.66%
EUR -0.15%   -0.05% 0.10% 0.26% 1.52% 0.55% 0.50%
GBP -0.10% 0.05%   0.15% 0.29% 1.57% 0.61% 0.55%
CAD -0.25% -0.09% -0.15%   0.18% 1.42% 0.44% 0.40%
AUD -0.41% -0.26% -0.28% -0.15%   1.26% 0.30% 0.24%
JPY -1.69% -1.55% -1.50% -1.46% -1.29%   -0.97% -1.04%
NZD -0.71% -0.55% -0.58% -0.46% -0.30% 0.98%   -0.05%
CHF -0.65% -0.51% -0.55% -0.40% -0.24% 1.03% 0.05%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).


Wall Street's main indexes registered marginal gains and the benchmark 10-year US Treasury bond retreated slightly below 4.3% on Tuesday. In the European morning, US stock index futures modestly lower and the 10-year yield moves sideways near 4.29%. The Fed is widely expected to leave the policy rate unchanged following the March meeting. Investors will scrutinize the dot plot for hints at the timing of the policy pivot and the total amount of rate reduction policymakers are forecasting for this year.

Fed Preview: Forecasts from 15 major banks, risk of a hawkish shift in the dot plot.

The UK's Office for National Statistics reported early Wednesday that inflation, as measured by the change in the Consumer Price Index (CPI), declined to 3.4% on a yearly basis in February from 4% in January. Other details of the report showed that the annual Retail Price Index increased 4.5% as forecast, while the Producer Price Index - Input decreased 2.7%. GBP/USD holds steady slightly above 1.2700 after these data.

Breaking: UK CPI inflation softens to 3.4% in February vs. 3.6% expected.

USD/JPY rose sharply and gained more than 1% on Tuesday following the Bank of Japan's (BoJ) monetary policy announcements. The pair preserves its bullish momentum early Wednesday and was last seen trading at its highest level since November above 151.50.

Japanese Yen adds to post-BoJ losses, approaches multi-decade low ahead of Fed.

NZD/USD lost more than 0.5% on Tuesday and touched its lowest level in nearly four months near 0.6030. The pair struggles to stage a rebound and was last seen trading modestly lower on the day at around 0.6050. Statistics New Zealand will publish fourth-quarter Gross Domestic Product (GDP) data in the early trading hours of the Asian session.

EUR/USD erased its daily losses after dropping below 1.0850 and closed the day virtually unchanged on Tuesday. The European economic docket will feature Construction Output data for January. During the European trading hours, European Central Bank (ECB) President Christine Lagarde will deliver a speech at the ECB and Its Watchers conference in Frankfurt.

Gold extended its sideways grind and posted small losses on Tuesday. XAU/USD continues to move up and down in a relatively tight range between $2,150 and $2,160 midweek.

Gold price extends the range play above $2,150 level ahead of the key FOMC decision.


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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