US Dollar declines to weekly lows after Fed's decision and Powell's presser

The Fed decided to hold rates at 5.25-5.50% as expected.
The bank revised higher GDP and inflation forecasts.
The official's interest rate expectations for 2024 remained at a median of 4.6%.

The US Dollar Index (DXY) declined towards the 103.50 area, following the Federal Reserve (Fed) decision to hold rates as expected. Economic activity and inflation forecasts were revised higher while Unemployment was lower. The highlight was that the interest rate projections saw the median rate unchanged at 4.6% in relation to the last protections. As a reaction, stocks edged higher while Treasury yields declined which added pressure to the USD.

The US economy remains resilient, with little evidence of inflation coming down and the labor market showing mixed signals. During the press conference, Jerome Powell addressed that the latest hot inflation readings do not affect the progress on inflation and that the bank won't overreact to only two months of data.

Daily digest market movers: DXY declines as markets digest Fed decisions and Powell's words

The US Federal Reserve keeps interest rates unchanged at 5.25%-5.50%.
The statement highlighted that the US economy remains strong and the labor market robust.
Regarding the upcoming meetings, the statement confirmed that decisions will continue to be data-driven, with a focus on balancing the dual mandate.
Despite the latest hot inflation reports, the 2024 interest rate expectations remain at a median of 4.6%. For 2025, the Federal Funds Rate (FFR) projection was raised from 3.6% to 3.9%.
Regarding the economic activity protections, the GDP for 2024 was revised upwards to 2.1% from December's 1.4% projection.
The Unemployment Rate is expected to stay at 4.0%, unchanged from previous forecasts.
The PCE Price Index target remains at 2.4%, with core PCE expected to reach 2.6% by the end of 2024.
During the Press conference, Jerome Powell addressed that the bank won't overreact to two months of data and that incoming decisions will be made on the incoming reports.

DXY technical analysis: DXY bullish momentum halted, bulls must defend SMAs

The technical outlook for DXY portrays that the bears are coming into play. The Relative Strength Index (RSI) exhibits a negative slope in positive territory which typically foretells a potential downside reversal. In addition, the Moving Average Convergence Divergence (MACD) returns flat green bars, adding arguments to a bearish flip.

Nonetheless, assessing the Simple Moving Averages (SMAs), it’s clear that sellers are taking charge as the index is now positioned below the 20, 100, and 200-day SMAs convergence around 103.50. If the buyers want to extend gains, they must recover the moving averages and consolidate above the mentioned area.

Central banks FAQs

What does a central bank do?

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%.

What does a central bank do when inflation undershoots or overshoots its projected target?

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.

Who decides on monetary policy and interest rates?

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%.

Is there a president or head of a central bank?

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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