- The US Dollar falls flat just hours before the very last Federal Reserve interest-rate decision of 2024.
- Traders will be looking at the dot plot for the number of rate cuts in 2025 and the Trump-effect.
- The US Dollar Index (DXY) hovers around 107.00 and is settling down ahead of Fed Chairman Powell speaking.
The US Dollar (USD) is taking a pause, not really going anywhere on Wednesday, with the DXY Index hovering around 107.00, in the runup to the Federal Open Market Committee (FOMC) interest-rate decision. As markets widely expect a 25 basis points rate cut, the focus will be on Federal Reserve Chairman Jerome Powell’s comments and the publication of the dot plot, the projection of each individual FOMC member on where he or she sees rates in the medium and long term.
The US economic calendar in the run-up to the Fed meeting did not saw much movement. The Building Permits and Housing Starts data for November were divided with an uptick in the Permits and a drop in the Housing Starts. From here on out it will be a snooze fest until the Fed rate decision and speach by Federal Reserve Chairman Jerome Powell.
Daily digest market movers: Housing data did not reveal much
- Near 13:30 GMT, the November Building Permits and Housing Starts were published.
- Building Permits increased by 1.505 million, above the expected 1.43 million and far from the 1.419 million in October.
- Housing Starts fell to 1.289 million units, missing the estimate from 1.34 million units and below the 1.311 million units in October.
- At 19:00 GMT, the Federal Reserve rate decision will be published. Expectations are for a 25 basis point rate cut to the 4.25%-4.50% range. At the same time, the Fed’s dot plot will be released as well.
- Near 19:30 GMT, Fed Chairman Jerome Powell will take the stage to deliver comments and have a Q&A on the recent rate decision from the Fed.
- Equities in Europe and Futures in the US are in the green, supported by the rate cut expectation.
- The CME FedWatch Tool is pricing in another 25 basis points (bps) rate cut by the Fed at Wednesday’s meeting by 95.4%.
- The US 10-year benchmark rate trades at 4.40%, in the middle of this week’s range.
US Dollar Index Technical Analysis: The last sprint (or slide)
The US Dollar Index (DXY) is set for the last biggest market-moving event for 2024, unless a geopolitical outside risk takes place. The dot plot projections will be the most market moving event. In case Fed members are factoring in a Trump-effect for 2025, upward rate projections for 2025 and further would mean a stronger US Dollar, with the yield gap between the US and other countries widening even more right at the end of the year amid thinner liquidity conditions.
On the upside, 107.00 remains a key level that needs to be reclaimed with a firm daily close above it before considering 108.00. When and if that finally happens, the fresh two-year high at 108.07 from November 22 is the next level to watch for.
Looking down, 106.52 is the new first supportive level in case of profit-taking. Next in line is the pivotal level at 105.53 (the April 11 high), which comes into play before heading into the 104-region. Should the DXY fall towards 104.00, the 200-day Simple Moving Average at 104.19 should catch any falling knife formation.
US Dollar Index: Daily Chart
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.
Read the full article here