- Jerome Powell pointed out that the progress on inflation stagnated but that it was on track to the 2% target.
- He also pointed out that monetary policy needs more time to do its job and that a rate hike is highly unlikely.
- Markets are pushing rate cuts to year-end.
The US Dollar Index (DXY) tumbled to 105.45 on Wednesday following the Federal Reserve (Fed) decision to hold rates at 5.25-5.50% and Chair Powell’s cautious comments.
The US economy, despite facing inflationary pressures and a tightening labor market, maintains robust domestic demand as per Powell's observations. While registering progress, inflation remains high, leading to the Fed's cautious stance on its future trajectory. As for now investors are giving up their hopes on three rate cuts this year and are instead delaying the start of the easing cycle to Q4.
Daily digest market movers: DXY drops as markets digest Powell’s comments
- The Federal Reserve (Fed) emphasized that progress on inflation stagnated and that they need more confidence to start cutting.
- During the press conference, Jerome Powell acknowledged significant progress toward the Fed's dual goals, but that inflation is still above target, with further progress uncertain.
- He also presented different case scenarios where he basically stated that if data continues coming strong, they will hold their monetary policy for longer. If data gives the bank more confidence, they will start cutting.
- However, they basically took off the table the possibility of a rate cut.
- Currently, the likelihood of a rate cut by the Fed in June and July is low while those odds for the September meeting dipped below 55%.
DXY technical analysis: DXY is poised for a downward move, despite slight bullish indicators
On the daily chart, the Relative Strength Index (RSI) is on a negative slope even as it remains in positive territory, implying that despite the buying momentum, there is increasing bearish pressure. The Moving Average Convergence Divergence (MACD) showcases flat red bars indicating the possibility of a bearish crossover soon. This signals that the selling force could pick up steam in the coming trading sessions.
Additionally, the DXY's position above its Simple Moving Averages (SMAs) suggests a slightly bullish tone in the short term. Although showing a negative short-term outlook, the fact that it remains above the 20, 100, and 200-day SMAs insinuates the undercurrent of the bull forces that could balance out the bear camp.
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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