US Dollar advances as Fed decision looms
- The DXY Index is exhibiting firm gains, trading near its mid-December highs around 103.75.
- Markets remain cautious ahead of the Fed’s decision on Wednesday.
- January’s NFPs are due on Friday.
The US Dollar (USD) Index soared on Monday, trading at 103.75 with gains hitting highs unseen since mid-December. This surge comes ahead of what is anticipated to be an eventful week with the first Federal Reserve (Fed) decision of 2024 on Wednesday and key labor market figures from the US on Friday.
In that sense, market expectations hint at a possible rate cut by the Fed in March. However, if economic growth sustains itself, a March rate cut seems unlikely. This is why bets have continued to shift toward the easing cycle beginning in May. In case the US continues to show resilience and markets delay expectations of the cuts, the downside is limited for the short term. The Fed’s tone on Wednesday will be key for the markets to continue placing their bets on the rate cuts calendar in 2024, so the USD may face volatility.
Daily Digest Market Movers: US Dollar gains as markets turn cautious ahead of Fed’s decision, labor market data
- Markets priced in that the Fed will hold its policy unchanged in its first meeting of 2024.
- The short-term trajectory will be determined if markets continue to give up on the easing cycle beginning in March.
- January's Nonfarm Payrolls are due on Friday and may affect those expectations. On Thursday, markets will also monitor ISM PMIs from the US from the first month of 2024.
- The CME FedWatch Tool indicates that the odds of a cut in March stand around 45%, while the possibilities of the easing cycle to start in May stand around 50%.
Technical Analysis: DXY bulls regain dominance on the battlefield, medium-term bearish bias still intact
The indicators on the daily chart are reflecting the revival of buying momentum. The positive slope in positive territory of the Relative Strength Index (RSI) indicate that bulls are attaining more strength. This recovery can also be observed in the rising green bars of the Moving Average Convergence Divergence (MACD), alluding to more substantial bullish influence.
Located above the 20-day Simple Moving Average (SMA), the Index shows the immediate market trend is favoring buyers. The positioning below the 100-day SMA, however, indicates a medium-term bearish bias. But an important development is the position above the long-term 200-day SMA, which suggests that the dominant trend is still bullish.
Consequently, the current technical environment indicates that while bears had been momentarily in control, DXY buyers are currently on the runway to reclaim dominance. The overall trend still seems to lean toward the bullish side.
Support Levels: 103.50 (200-day SMA),103.30, 103.00.
Resistance Levels: 103.90,104.00,104.20.
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.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
