US Dollar turns green after Fed passes a big rate cut without disturbing the Greenback

The US Dollar turns stronger ahead of the US trading session.
Traders are seeing weekly Jobless Claims coming in stronger for this week.
The US Dollar Index trades back into its tight bandwidth range despite a previous breakout.

The US Dollar (USD) trades back at levels where it was before the US Federal Reserve (Fed) meeting took place, and is even heading higher just ahead of the US trading session. Traders quickly pared back initial losses on Wednesday after Fed Chairman Jerome Powell said that a 50-basis-point (bps) rate cut would not be the new normal, although the Greenback is retreating further this Thursday. Going forward, it looks like economic data ahead of each rate decision will determine the size of the cut, if any, an assumption that was perceived as rather hawkish by markets.

On the economic data front, traders see already chances for another 50-basis-point rate cut diminish with the economic data points for this Thursday coming in stronger. The weekly Jobless Claims come in lower at 219,000 against the expected 230,000. The Philadelphia Manufacturing Index ties back up with growth at 1.7 againsth the expected contraction by -1 expected.

Daily digest market movers: Back in range

Quick summary of the overnight Fed rate decision: A 50-basis-point rate cut was given with another 50 basis points decline expected for the remainder of 2024. Fed Chairman Powell reiterated that 50-basis-point cuts will not be the new normal and that the Fed will remain data-dependent in order to assess which rate cut size is appropriate for the upcoming meeting.
The Bank of England (BoE) has kept its interest rate unchanged at 5%, with a vote split 8 to 1 with one member asking to cut rates. Governor Andrew Bailey said the BoE will reduce rates gradually over time.
At 12:30 GMT, the weekly Jobless Claims saw Initial Claims came in lower at 219,000, against the expected 230,000. Continuing Claims shrunk as well to 1.829 million, lower from the 1.843 million previously.
In the slew of that Jobless data, the Philadelphia Fed Manufacturing Survey for September jumped higher as well, even out of contraction with a positive 1.7. Expectation was for a -1 against the -7 from last month.
At 14:00 GMT, Existing Home Sales for August came in softer than expected with only 3.86 million units against the expected 3.9 million. No real impact on markets on the back of this number.
Equity markets are having a field day on the back of the Fed rate decision. In Japan, both the Nikkei and the Topix closed off over 2% higher. European indices are following suit by over 1% in the green and US futures are seeing the Nasdaq outperform by 2% while the S&P 500 and the Dow Jones follow by nearly 1.5% positive.
The CME Fedwatch Tool shows a 65.0% chance of a 25 basis point rate cut at the next Fed meeting on November 7. The remaining 35.0% is pricing in another 50-basis-point rate cut.
The US 10-year benchmark rate trades at 3.75%, higher from Wednesday and further off the 15-month low of 3.60%.

US Dollar Index Technical Analysis: Really going nowhere

The US Dollar Index (DXY) is back in its range after a very brief field trip lower, outside of that bandwidth that is determining the DXY moves for the past few weeks. With this Fed rate cut and projections for this year, a gradual further easing of the Greenback should play out. Expect pressure to build up again on the lower end of the bandwidth, which could be snapped if economic data deteriorates and leads the Fed towards another 50-basis-point rate cut in November.

The upper level of the recent range remains 101.90. Further up, the index could go to 103.18, with the 55-day Simple Moving Average (SMA) at 102.74 on the way. The next tranche up is very misty, with the 200-day SMA and the 100-day SMA at 103.79, just ahead of the big 104.00 round level.

On the downside, 100.62 (the low from December 28, 2023) has been broken overnight, though was unable to get a daily close below it. Should it happen, the low from July 14, 2023, at 99.58, will be the next level to look out for. If that level gives way, early levels from 2023 are coming in near 97.73.

US Dollar Index: Daily Chart

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

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.

How often does the Fed hold monetary policy meetings?

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.

What is Quantitative Easing (QE) and how does it impact USD?

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.

What is Quantitative Tightening (QT) and how does it impact 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.

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