Forex Today: US Dollar benefits from hawkish Fed repricing, focus shifts to FOMC Minutes
Here is what you need to know on Wednesday, May 20:
The US Dollar (USD) preserves its strength early Wednesday after outperforming its major rivals on Tuesday. Later in the American session, the US Treasury will hold a 20-year note auction and the Federal Reserve (Fed) will publish the minutes of the April policy meeting.
The USD benefited from surging US Treasury bond yields on Tuesday as investors now expect a strong chance of the Federal Reserve tightening the policy to control inflation. After rising nearly 0.4% on Tuesday and touching its highest level since early April, the USD Index clings to modest daily gains at around 99.40 in the European morning on Wednesday. According to the CME FedWatch Tool, markets are currently pricing in a nearly 60% probability of the Fed raising the policy rate by 25 basis points at least once by the end of the year.
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 Australian Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.25% | -0.49% | 0.17% | 0.15% | 0.61% | 0.19% | 0.49% | |
| EUR | -0.25% | -0.76% | 0.00% | -0.11% | 0.34% | 0.00% | 0.21% | |
| GBP | 0.49% | 0.76% | 0.70% | 0.66% | 1.11% | 0.77% | 0.95% | |
| JPY | -0.17% | 0.00% | -0.70% | -0.08% | 0.36% | -0.05% | 0.26% | |
| CAD | -0.15% | 0.11% | -0.66% | 0.08% | 0.45% | 0.03% | 0.28% | |
| AUD | -0.61% | -0.34% | -1.11% | -0.36% | -0.45% | -0.34% | -0.06% | |
| NZD | -0.19% | -0.00% | -0.77% | 0.05% | -0.03% | 0.34% | 0.19% | |
| CHF | -0.49% | -0.21% | -0.95% | -0.26% | -0.28% | 0.06% | -0.19% |
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 US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
US Vice President JD Vance said on Tuesday that President Donald Trump is still pursuing a diplomatic solution to the conflict with Iran but added that they remain "locked and loaded" to restart the military campain if nuclear talks fail. Meanwhile, Iran’s Foreign Minister Abbas Araghchi said Tehran has gained military knowledge from previous hostilities and warned that "a return to war will feature many more surprises."
The UK's Office for National Statistics reported on Wednesday that annual inflation, as measured by the change in the Consumer Price Index (CPI), declined to 2.8% in April from 3.3% in March. This print came in below the market expectation of 3%. Other details of the report showed that the Producer Price Index (PPI) - Input, rose 7.7% on a yearly basis, up sharply from the 5.3% increase recorded in March. GBP/USD struggles to find direction following these data and fluctuates in a narrow channel below 1.3400.
Gold (XAU/USD) came under heavy bearish pressure following Monday's indecisive action and lost nearly 2% on Tuesday. XAU/USD extended its slide in the early trading hours of the Asian session and touched its lowest level since late March near $4,450 before recovering above $4,470 by the European morning.
EUR/USD struggles to stage a rebound and trades below 1.1600 early Wednesday after losing about 0.4% on Tuesday.
USD/JPY stays in a consolidation phase at around 159.00 after posting gains for the seventh consecutive trading day on Tuesday. Japanese Prime Minister Sanae Takaichi said on Wednesday that the government is not at the stage to comment on the scale of the extra budget, adding that it's possible the extra budget is aimed mainly at responding to the Middle East situation.
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.
Author
Eren Sengezer
FXStreet
As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.
