- The US Dollar turns red with the US session underway.
- Traders are on edge to hear from US Fed chairman Jerome Powell.
- The US Dollar Index sees pressure building on 105 with a break to the downside.
The US Dollar (USD) is about to have a very binary outcome with US Federal Reserve (Fed) Chairman Jerome Powell taking the stage this Wednesday. Although no hikes are expected, the stakes are very high. Not only did recent data show an uptick in economic activity with the labor market still holding strong in the US, inflationary pressures are starting to gain momentum yet again.
As if Powell does not have a challenging enough job, the current inflationary pressure is coming from the energy market. The energy sector is a corner of the inflation basket where the Fed has no control, except by triggering a recession that would kill any additional demand for energy from a business perspective. A hawkish pause needs to be delivered as markets will want to see if the Fed is in a better position to deliver it, following the appalling performance from European Central Bank (ECB) Chairman Christine Lagarde last week.
Daily digest: US Dollar either way
- US Mortgage Application Index rose by 5.4% since last week.
- Thai Baht drops 1% against the Greenback in Asian trading.
- Expect to hear a needle drop in the markets during the European session and up until 18:00 GMT. The Fed will communicate first its interest rate decision, which is expected to remain unchanged at 5.5%. A joint statement will be available as well at the time of the rate communication.
- In the brief, the dot-plot (Phillips curve) will be communicated as well. Every Fed member who was a voter at this September meeting gets his chance to pencil in where rates will be in the coming months and years. This way a consensus view can be made on how high the Fed thinks it will need to go and for how long rates will remain unchanged.
- Thirty minutes later, at 18:30 GMT, Jerome Powell will take the stage and give his insights on why the Fed hiked or paused. Here will be the crucial moment if Powell is able to deliver that expected hawkish message to the markets that the Fed will not relent on controlling inflation.
- Equities are in the red again this Wednesday as there is no escaping the negative mood stock markets are in this week. At the moment the Hang Seng Index and the Shanghai CSI 300 index are both negative on their year-to-date performance, erasing any gains for the whole of 2023.
- The CME Group FedWatch Tool shows that markets are pricing in a 99% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September. Traders though will need to watch out for any hawkish rhetoric from Powell as inflation has been ticking up recently.
- The benchmark 10-year US Treasury yield trades at 4.36% and peaked on Tuesday. Yields are ticking up again after earlier a flight to safety triggered the opposite with bond prices rising.
US Dollar Index technical analysis: false pressure?
THe US Dollar is facing selling pressure this week with market participants unwinding some of their US Dollar long positions and others trying to pre-position for the main event this Wednesday. The fact that the US Dollar Index (DXY) was able to stay above 105, even with a brief breakdown, points to the importance of the level.
Expect a binary outcome with possibly the DXY making new yearly highs if Powell succeeds in delivering a hawkish message. If markets perceive the message as dovish, the summer rally of the Greenback could come to an end by going into Thursday.
The US Dollar Index (DXY) has edged up, reaching 105.41. This is just a sigh away from the 2023 high near 105.88. Should the DXY be able to close above there for the week, expect the US Dollar to go even stronger in the medium turn.
On the downside, the 104.44 level seen on August 25 kept the Index supported on Monday, halting the DXY from selling off any further. Should the uptick that started on September 12 reverse and 104.44 gives way, a substantial downturn could take place to 103.04, where the 200-day Simple Moving Average (SMA) comes into play for support.
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.
US Dollar braces for Powell as traders are unwinding US Dollar long positions appeared first at: Source