US Dollar finds momentum as markets await Wednesday's session


  • USD sees continuous rise with keen eye toward FOMC meeting, prolonging its third consecutive day of gains.
  • US economic outlook remains strong and investors await fresh economic forecasts from the FOMC.
  • Markets anticipate hawkish tone on Wednesday’s Fed decision.

On Tuesday, the US Dollar Index (DXY) saw an upward trend toward the 105.36 area. The session won’t provide any highlights as cannons are pointing to Wednesday’s session.

The two-day Federal Open Market Committee (FOMC) meeting, which kicked off on Tuesday and will end on Wednesday, is eyed by market observers. Any changes to the interest rate outlook or guidance by Federal Reserve (Fed) members are bound to stir market movements. The outcome of the famous dot plot will also be closely watched.

Daily digest market movers: DXY gains further ground on quiet Tuesday, eyes on FOMC

  • Updated dot plots will provide valuable insight. A single shift from three interest rate cuts to two by a Fed policymaker could potentially elevate the 2024 median from 4.625% to 4.875%.
  • Markets expect a seemingly 'hawkish hold' from the Fed, keeping rates at 5.5%.
  • Consequently, the odds of a September cut appear to be a 50:50 chance, and November cut odds stand at approximately 85%.
  • US will also release inflation data on Wednesday. The core Consumer Price Index (CPI) for May is forecast to decelerate slightly to 3.5% YoY, while headline inflation is anticipated to remain steady at 3.4%.

DXY technical analysis: Fundamentals on Wednesday to stir trajectory

Indicators on the daily chart remain strong, and both the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) jumped to positive terrain. Additionally, the Index recovered above the 20, 100, and 200-day Simple Moving Averages (SMA), which brightened the outlook for the short term.

Fundamental stimulus on Wednesday will dictate the pace of the next sessions, and markets should eye the 106.00 area in case the DXY faces bullish pressure. On the downside, the 104.50 area remains as a strong support.

 

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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