US Dollar jumps off the low after Fed's Jefferson does not confirm rate cuts for 2024

The US Dollar consolidates on Monday after whipsaw moves last week.
The economic calendar is quiet on Monday ahead of a busy week ahead.
The US Dollar Index trades around 105.30, in the middle of last week’s range.

The US Dollar (USD) is off the low for this Monday after comments from Fed Vice Chairman Philip Jefferson said that it is appropriate to keep rates steady for longer. The week starts calm on the economic data front, but it will get busier as days go by with the release of the US Producer Price Index (PPI) numbers on Tuesday and the Consumer Price Index (CPI) data on Wednesday.

On Monday, two US Federal Reserve (Fed) members are set to take the stage: Federal Reserve Vice Chair Phillip Jefferson is set to deliver opening remarks and participate in a Q&A session at the Theory and Practice conference in Cleveland. Jefferson will be joined by Federal Reserve Bank of Cleveland President Loretta Mester in that same session. Both Fed speakers are voting members at the Federal Open Market Committee (FOMC) for this year.

Daily digest market movers: Fed might phase out a cut for 2024

A very quiet start to this week is expected. No real outliers to report on the quote board, besides the Czech Krona (USD/CZK), which is outperforming against the Greenback by nearly 0.80%.
At 13:00 GMT, Fed Vice Chair Phillip Jefferson and Federal Reserve Bank of Cleveland President Loretta Mester have both participated in a Q&A session at the Theory and Practice conference in Cleveland.
- Fed's Jefferson broke away from the Fed projections by saying that it is more appropriate to keep rates steady for longer until more confidence is found that inflation is coming down.
The US Treasury Department will auction a 3-month and a 6-month bill around 15:30 GMT.
The equity markets started the week very mixed after the German Dax posted a fresh historic high on Friday. European equities are slumping while US equities are in the green by 0.50%.
The CME Fedwatch Tool suggests a 96.5% probability that June will still see no change to the Federal Reserve's fed fund rate. Odds of a rate cut in July are also out of the cards, while for September the tool shows a 48.6% chance that rates will be 25 basis points lower than current levels.
The benchmark 10-year US Treasury Note trades around 4.47%, around the lower range for this Monday after hitting 4.94% earlier.

US Dollar Index Technical Analysis: Fed Jefferson turning hawkish

The US Dollar Index (DXY) is entering a soft patch with the risk of easing a bit. Markets are considering three scenarios, two of which favoring a weaker Greenback. Traders will be looking closely at the incoming data to look for confirmation on either three.

The first two scenarios that lead to a softer US Dollar are stagflation or a pickup in disinflation. With stagflation, economic growth would start to deteriorate while inflation would remain elevated, putting the Fed on the spot of being unable to lower interest rates in order to soften the blow of the economic contraction. Meanwhile, a resumption of the disinflation trend might bring June back into play for a rate cut and trigger a soft landing. The only element that would see the US Dollar stronger would be if economic data outperforms while inflation remains elevated as well, as this scenario would open the door for further rate hikes.

On the upside, 105.52 (a pivotal level since April 11) needs to be recovered, ideally through a daily close above this level, before targeting the April 16 high at 106.52 for a third time. Further up and above the 107.00 round level, the DXY index could meet resistance at 107.35, the October 3 high.

On the downside, the 55-day and the 200-day Simple Moving Averages (SMAs) at 104.54 and 104.25, respectively, have already provided ample support. If those levels are unable to hold, the 100-day SMA near 103.89 is the next best candidate.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

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.

How often does the Fed hold monetary policy meetings?

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.

What is Quantitative Easing (QE) and how does it impact USD?

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.

What is Quantitative Tightening (QT) and how does it impact 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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