US Dollar lost some ground while markets await fresh drivers


  • The DXY stood around 104.15 on Wednesday.
  • Fed’s Collins, Kashkari and Kugler were on the wires sounding somewhat hawkish.
  • US Treasury yields are slightly up and limit the Greenback’s losses.

The US Dollar Index (DXY) is trading neutrally at 104.15 on Wednesday, while markets assess several Federal Reserve (Fed) officials' statements to continue placing their bets on activity at the next few Federal Open Market Committee (FOMC) meetings.

The US Federal Reserve's hawkish hold, justified by a robust jobs report and continuous strong growth in Q1, has made dovish bets on the Fed less attractive over the past week. As a reaction, the USD strengthened on the back of rising US Treasury yields as markets are giving up on a first rate cut arriving in March.

Daily digest market movers: US Dollar holds its ground as markets assess Fed officials’ comments

  • Fed’s Adriana Kugler noted that the job on inflation isn’t quite done, but that at some point when the economy cools down, the bank will consider rate cuts.
  • Elsewhere, Neel Kashkari stated that two to three rate cuts in 2024 seem appropriate.
  • In line with those comments, Susan Collins also cautioned that the bank needs more data to support rate cuts.  
  • The CME's FedWatch Tool hints at reduced odds for a rate cut in March, which currently stands at 20%. Those odds rise to 50% for the May meeting, but the probabilities of a hold are also high.

Technical analysis: DXY falls below the 100-day SMA, but bulls trim daily losses

The technical indicators on the daily chart reflect a somewhat neutral to bearish short-term momentum. The Relative Strength Index (RSI) paints a picture of weakening bullish momentum, given its negative slope, despite being in positive territory. This condition normally precedes a potential reversal or pullback as the buying force starts to lose its grip.

In the bigger picture, the Simple Moving Averages (SMAs) continue to favor the bulls. Despite the selling pressure pulling the asset below the 100-day SMA, it is comfortably residing above both the 20-day and 200-day SMAs. This demonstration implies that the overall buying force remains dominant. 

These signals suggest while the buyers seem to be taking profits, further downside can be expected in the short term. But as long as the bulls defend the mentioned SMAs, the longer-term outlook will be bright.

 

 

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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