- The US Dollar sees its fifth consecutive gains starting to fade ahead of the Fed.
- Traders brace for the Fed decision, with Powell and new economic projections on the docket.
- The US Dollar Index slides back below 104.00 with gains being erased towards the Fed meeting.
The US Dollar (USD) faces some hiccups with the Federal Reserve rate decision nearing, falling from session's high at 104.15, back below 104.00. All eyes are on the US, with the US Federal Reserve (Fed) set to issue its monetary policy statement followed by a speech and comments from Fed’s Chairman Jerome Powell. the crucial element will be the so-called dot plot (or Philip’s Curve), which should give markets more insights on whether three or only two cuts are expected for this year.
In the dot plot, each voting member of the Fed’s Federal Open Market Committee (FOMC) will pencil in his or her view on where rates will be in the current year, one year ahead, and in the longer term. Markets have been pushing for a stronger US Dollar these past few days amid increasing speculation that the Fed might signal fewer than three rate cuts for this year. The Dot Plot release this evening will give markets confirmation on this, and could see some US Dollar weakness in case forecasts of three cuts are still on the table.
Daily digest market movers: Pressure builds towards 1800 GMT
- The US is mulling to impose sanctions on chips and technology companies from China, Bloomberg reports.
- Ahead of the Fed, the Mortgage Bankers Association has released the weekly Applications Index at -1.6% . The previous number was an increase of 7.1%.
- The Fed Rate Decision release is taking place at 18:00 GMT, which includes:
- The Monetary Policy Statement
- The FOMC Economic Projections
- Near 18:30 GMT, US Fed Chairman Jerome Powell will speak to markets and deliver his statement followed by a Q&A with the press.
- Equities are starting to turn and look up: European indices are erasing earlier losses while US equities are near flat.
- According to the CME Group’s FedWatch Tool, expectations for a Fed pause in today’s meeting are at 99%, while chances of a rate cut stand at 1%. For the next meeting on May 1, 92.4% see the rate unchanged, with 7.5% opting for a rate cut..
- The benchmark 10-year US Treasury Note trades around 4.28%, a touch softer than Tuesday.
US Dollar Index Technical Analysis: A disappointment has been priced in already
The US Dollar Index (DXY) is heading back above 104.00 on Wednesday ahead of the US Fed rate decision. The strong US Dollar comes as markets start to pare back their euphoria from earlier this year, when three swift rate cuts were expected. Expectations have been tuned down to only two cuts and done. In this context,the dot plot release could see the DXY paring back some earlier gains to look for a balanced middle ground.
On the upside,104.96 remains the first level in sight. Once above there, the peak at 104.97 from February comes into play, ahead of the 105.00 region with 105.12 as the first resistance.
Some support should come in from the 200-day Simple Moving Average (SMA) at 103.70, the 100-day SMA at 103.58, and the 55-day SMA at 103.52. The 103-area, thus, looks well equipped and covered with support levels to catch any retreats in the DXY.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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