- The US Dollar trades sideways after a rather uneventful Federal Reserve policy meeting.
- Fed Chairman Jerome Powell did not fold under pressure from President Trump to lower rates.
- The US Dollar Index (DXY) remain stuck around 108.00 and is looking for direction.
The US Dollar Index (DXY), which tracks the performance of the US Dollar against six major currencies, orbits around 108.00 at the time of writing on Thursday and is still looking for direction or drivers. All eyes are on the European Central Bank (ECB), where a 25 basis point (bps) interest rate cut is expected. After the rather hawkish pause from the Federal Reserve (Fed), markets want to see if the ECB will comment on the US political scene with Donald Trump back in office.
That is something Fed Chairman Jerome Powell did not do. He refused to comment on any question referring to President Donald Trump. Several traders are even seeing the hawkish hold from the Fed as a message to Trump that the central bank will remain data dependent, not White House dependent. All this is combined with the fourth quarter preliminary US Gross Domestic Product (GDP) release later this Thursday.
Daily digest market movers: Lagarde to face questions on Trump?
- Asian markets will remain quiet this week due to the Lunar New Year, which started on Tuesday, with Chinese traders returning to the markets on February 5.
- At 13:15 GMT, the European Central Bank will publish its interest rate decision and monetary policy statement.
- At 13:30 GMT, the fourth quarter preliminary US Gross Domestic Product will be released:
- Headline GDP is expected to soften to 2.6% from 3.1% in the previous quarter.
- The Personal Consumption Expenditure Prices (PCE) was at 1.5%, with no forecast available.
- The core PCE element is expected to increase by 2.5% from the previous 2.2%.
- The US Jobless Claims for the week ending July 24 are due as well at 13:30 GMT, with Initial Claims expected to ease to 220,000, from 223,000 last week. Continuing Claims are set to soften to 1.890 million, from 1.899 million last week.
- At 13:45 GMT, ECB Chairman Christine Lagarde will deliver her monetary policy speech and proceed with the usual Q&A round.
- Equities are off to a good start this Thursday, ahead of the expected ECB interest rate cut decision. All European indices are in the green with the German Dax reaching a fresh all-time high. US futures are all in the green as well.
- The CME FedWatch tool projects an 80.0% chance for no change in the Fed’s policy rate for its next meeting on March 19.
- The US 10-year yield is trading around 4.490% and sets a fresh low for this year.
US Dollar Index Technical Analysis: Politics vs Policy
The US Dollar Index (DXY) is going nowhere while US yields are eking out more losses. The biggest concern for markets is the pressure from US President Trump over the Fed, with his demand to get rates and its borrowing cost lower. After last night’s Fed decision, things could heat up further as Trump could start to use more and more unconventional tools to influence the Fed, harming its credibility.
The psychological level of 108.00 is still to be recovered on a daily close, which proves to be a hard task. From there, 109.30 (July 14, 2022, high and rising trendline) is next to pare back last week’s losses. Further up, the next upside level to hit before advancing further remains at 110.79 (September 7, 2022, high).
On the downside, the 55-day Simple Moving Average (SMA) at 107.64 and the October 3, 2023, high at 107.35 acts as a double support the DXY price. For now, that looks to be holding, though the Relative Strength Index (RSI) still has some room for the downside. Hence, rather look for 106.52 or even 105.89 as better levels for US Dollar bulls to engage and trigger a reversal.
US Dollar Index: Daily Chart
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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