US Dollar remained fairly neutral after FOMC minutes, eyes PMIs on Thursday


  • DXY Index trades with minor gains on Wednesday near 104.80.
  • The market anticipates Fed will hold interest rates flat in June and July.
  • FOMC minutes showed uncertainty amongst members on the inflation's path but confidence that it will eventually get to the 2% target.

The US Dollar Index (DXY) is trading at 104.80, showing mild gains in Wednesday’s American session. The Greenback continues to exhibit resilience, brushing off the effects of the soft inflation data reported last week, backed by the cautious words of Federal Reserve (Fed) officials. The Federal Open Market Committee (FOMC) Minutes from May's meeting didn't show any fresh insights and confirmed that members are not certain on how long will the monetary policy will take to bring inflation down to 2% but that it will eventually achieve it.

Overall, the US economy is witnessing consistent growth, evident from dwindling Fed easing expectations despite softening labor and inflation figures. The hawkish stance from Fed officials suggests rate cuts are unlikely in the near future, which is holding the USD afloat.

Daily digest market movers: DXY gives up some gains following Fed minutes

  • May’s FOMC meeting minutes revealed that several participants expressed uncertainty about how restrictive the policy needs to be.
  • Some participants indicated a readiness to tighten policy further if risks to the outlook emerge and warrant such measures. Also, participants noted it would take longer than expected to be more confident that inflation is moving sustainably towards 2%.
  • However, members expressed confidence on inflation eventually easing to the 2% long-term target.
  • The CME FedWatch Tool indicates no expectation for a rate cut in June or July but a 37% chance of maintaining current policy in September.

DXY technical analysis: DXY displays conflicting signals, hinting toward a possible impending shift.

The DXY's Relative Strength Index (RSI) remains flat, stationed in negative territory, suggesting the sellers might have already done the bulk of their work. In conjunction, the Moving Average Convergence Divergence (MACD) offers a flat red bar histogram, further confirming the near-term bearish sentiment.

Furthermore, the bears have gained ground recently, with the index now residing below the 20-day Simple Moving Averages (SMA). This indicates that selling pressure has mounted in the short term, though markets await stronger signs to confirm a strengthening bearish grip.

That being said, the Dollar Index remains above the critical 100 and 200-day SMAs, hinting that bulls still maintain a grip.

 

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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