US Dollar heads flat into the Fed's rate decision and Powell's comments
Most recent article: US Dollar trades neutrally in anticipation of Fed's final 2023 meeting
- The US Dollar unchanged ahead of the Fed rate decision
- Traders brace for an expected firm pushback on rate cuts from the Fed.
- The US Dollar Index hovers around 104 with 105 targeted if the Fed delivers hawkish message.
The US Dollar (USD) is steady and sideways against all major G20 currencies ahead of the US Federal Reserve meeting. Traders are bracing for the last US Federal Reserve meeting of 2023. Although another pause in the monetary policy rate looks to be a given, the guiding speech from US Fed Chairman Jerome Powell will be the event that might move the needle. Another factor could be the Fed’s Dot Plot, forecasting the trajectory of interest rates based on the consensus views of Fed members.
On the economic front, all eyes will be on 19:00 GMT for the official rate announcement and initial guidance, followed by the press conference with Jerome Powell at 19:30 GMT. Meanwhile the US Producer Price Index number were overall in line in this final reading and triggered no real substantial changes.
Daily digest: DXY to square one
- Near 12:00 GMT the Mortgage Bankers Association (MBA) has released the Mortgage Applications for last week. Previous number was 2.8% and now came out at 7.4%.
- The Producer Price Metrics measures the inflation on the production side for manufacturers and companies. Any upticks in the Producer Price metrics will be passed on further down the line to the clients in the stores and filter into Consumer Price Index numbers:
- Monthly Headline Producer Price Index went from -0.5% to 0.0%.
- Yearly Headline Producer Price Index went from 1.3% to 0.9%.
- Monthly Core Producer Price Index number remained unchanged at 0%.
- Yearly Core Producer Price Index to decline from 2.4% to 2%.
- At the stroke of 19:00 the Fed will release its monetary policy, expected to remain unchanged at 5.5%. A statement will be released as well, which will have the Fed’s Dot Plot projections.
- At 19:30 GMT, US Fed Chairman Jerome Powell will take the stage and give guidance to the markets on the stance of the Fed.
- Equites are holding steady in European trading with minor changes for the day. US futures are mildly in the green as well ahead of the main event this Wednesday. Chinese equities were in the ropes again with the Hong Kong Hang Seng down over 1% at its closing bell. With markets still doubting between risk-on or risk-off, the steady and sideways DXY moves confirms that traders are awaiting further elements.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 98.2% chance that the Federal Reserve will keep interest rates unchanged this Wednesday.
- The benchmark 10-year US Treasury Note trades near 4.17%, in a whipsaw pattern where the floor around 4% for now looks to be holding the pressure for now.
US Dollar Index technical analysis: Powell has the final say
The US Dollar is sending very mixed signals on its US Dollar Index (DXY) daily chart. The fact that the daily price action is showing lower highs with support holding steady along that 200-day Simple Moving Average (SMA) at 103.55, points to a bearish pressure building. This makes it very clear that two scenarios are on the table for the outcome in the DXY this Wednesday.
The DXY could snap the declining tops and print new highs for not only the past few days, but for the past week. This means that 104.26 needs to break in order to deliver a bullish signal and see the Greenback advance against several major different currencies. In a case where the Fed and Powell deliver a very hawkish message to the markets, with cuts being repriced to the second or third quarter of this year, DXY could soar towards 105.
To the downside, the 200-day SMA could snap if the Fed drops the ball. Markets are expecting cuts, and should the Dot Plots confirm that idea, while Powell would say that cuts are not foreseen in an attempt to remain hawkish. Expect traders to disregard his comments, buy into US bonds, with US yields dropping again and seeing the Greenback in its turn nosediving towards 102.50, the low of November.
Central banks FAQs
What does a central bank do?
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
What does a central bank do when inflation undershoots or overshoots its projected target?
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
Who decides on monetary policy and interest rates?
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Is there a president or head of a central bank?
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
Author
Filip Lagaart
FXStreet
Filip Lagaart is a former sales/trader with over 15 years of financial markets expertise under its belt.
