US Dollar down ahead of first Fed meeting for Powell this year
|- The US Dollar retreats after a false bullish pop higher, ahead of Fed meeting.
- Traders got caught by surprise on a downbeat ADP number.
- The US Dollar Index is hovering around the 200-day SMA and remains stuck in its pattern.
The US Dollar (USD) is facing its first main event of 2024 with the US Federal Reserve rate decision for January. All eyes will be on the Federal Reserve Chairman Jerome Powell and what he will deliver to the markets. Although no rate changes are expected, the tone of the statement from Powell can still be either hawkish or dovish and could dampen hopes for a quick rate cut further with a repricing for a (stronger) US Dollar at hand.
On the economic front, a perfect menu lies ahead of the main event this Wednesday evening. Traders already had the ADP Employment Change, which was coming in substantially lower than expected. The Chicago Purchasing Managers’ Index for January is underpinning a rather downbeat picture for this Tuesday with a further contraction for the sector.
Daily digest market movers: ADP and Chicago PMI tackle Greenback
- The Mortgage Bankers Association (MBA) has released its weekly number of mortgage applications, heading from 3.7% to -7.2%.
- The ADP Employment Change report went from 164,000 revised down to 158,000, with the January number coming in at 107,000. Far below the estimates of 145,000.
- The Employment Index for the fourth quarter went from 1.1% to 0.9%.
- At 14:45 the Chicago Purchase Managers Index (PMI) for January was released and contracted further from 47.2 to 46. No synchronised recovery thus with the PMI numbers from last week.
- The Federal Open Market Committee (FOMC) is set to release its first rate decision for 2024:
- At 19:00 GMT the Fed will release its rate decision with a joint written statement.
- Around 19:30 US Fed Chairman Jerome Powell will take the stage and further go into details on how the Fed sees current conditions in the US.
- Although a rate change is not expected, the meeting could still hold a hawkish or dovish undertone which could send the Greenback respectively higher or lower in the US Dollar Index.
- Equity markets are lower after missed earnings from AMD and Alphabet. Add in there the miss on expectations for the Chinese Manufacturing PMI, and risk appetite looks to be very mild this Wednesday.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 97.9% possibility for an unchanged rate decision this Wednesday evening, with a slim 2.1% chance of a cut.
- The benchmark 10-year US Treasury Note trades near 4.01% and is at the lowest level for this week ahead of the Fed rate decision.
US Dollar Index Technical Analysis: Things are turning ugly
The US Dollar Index (DXY) might find its catalyst this Wednesday. For nearly two weeks now it has been unable to trade away from both the 55-day (103.02) and the 200-day (103.54) Simple Moving Averages despite several false breaks and both MAs getting all chopped up.
Although the Fed meeting this Wednesday is unlikely to usher in any rate changes, the outcome could still favor the Greenback if Powell delivers a hawkish statement to the markets. Such a move would see market expectations pushback on when the Fed will make its first rate cut.
In such a scenario the DXY will be able to break away from the 200-day SMA. Look for 104.36 as the first resistance level to the upside, in the form of the 100-day SMA. If that gets breached as well, nothing will hold the DXY back from heading to either 105.88 or 107.20 – the high of September.
On the other hand, with the repetition of another break above the 200-day SMA, yet again, a bull trap could also form if prices then start sliding below the same moving average. This would see a long squeeze, with US Dollar bulls being forced to start selling around 103.10 at the 55-day SMA. Once below that, the downturn would be open to 102.00.
US Dollar FAQs
What is the US Dollar?
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
How do the decisions of the Federal Reserve impact the US Dollar?
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
What is Quantitative Easing and how does it influence the US Dollar?
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
What is Quantitative Tightening and how does it influence the US Dollar?
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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