US Dollar retreats to near flat with markets clueless on what to do next on US rate anticipations

The US Dollar trades marginally in the green post-GDP
Market sentiment turns into risk-off, with equities in the red in Asia, Europe and US.
The US Dollar Index steady at 104.00.

The US Dollar (USD) is off its intraday high in the aftermath of the second US Gross Domestic Product (GDP) reading. Although the actual Headline GDP number was just 0.1% softer than expected, concerns rather emerged on the Personal Consumption Index. That rose, although expected after that red-hot Consumer Price Index report from two weeks ago, bigger than expected and is creating concerns among traders on what to do next. All eyes will be on the US Federal Reserve now, whether they will hike one more time or not, seeing their data dependent stance, which is paving the road for a very bumpy rate towards that eagerly awaited first rate cut later this year.

On the economic front, markets all economic data is out of the way and all eyes will now be on the three US Federal Reserve members that are due to speak. With the very mixed second reading on US GDP and PCE it looks like markets will be hanging on every word the US Fed officials will have to say about the current situation. Is this a one-off, or a second -round effect that only kicks in now, though needs further tightening to remain controlled for keeping the disinflationary momentum going?

Daily digest market movers: Fed to guide next

Ahead of the US session, some European Central Bank (ECB) comments from ECB's Peter Kazimir, who said that disinflation is taking place much quicker than expected, and that there is no reason to rush for a rate cut, with June as best guess from the ECB member.
The Mortgage Bankers Association (MBA) has released its Mortgage Applications Index for this week. Last week there was a decline of 10.6%, with this week another 5.6% decline.
At 13:30 GMT, the second reading of the US Gross Domestic Product (GDP) for the fourth quarter will be released:
- Headline GDP came in a touch softer at 3.2% from 3.3% in the first reading.
- Core Personal Consumption Expenditures ticked up to 2.1% from 2.0%.
- The quarterly Personal Consumption Expenditures Price Index jumped up as well from 1.7% to 1.8%
Between 17:00 and 17:45 GMT, three US Federal Reserve officials are due to take the stage.
- At 17:00 GMT, Atlanta Fed President Raphael Bostic will speak first.
- Near 17:15 GMT, Boston Fed President Susan Collins will follow.
- At 17:45 GMT, New York Fed President John Williams will take the stage.
Equities are easing a touch in Europe and the US, off their low for this Wednesday. The German Dax is even flirting with a small green print. US equity futures are still in the red ahead of the US opening bell.
According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the March 20 meeting are at 99.5%, while chances of a rate cut stand at 0.5%.
The benchmark 10-year US Treasury Note trades around 4.30%, and is not far off this week’s peak at 4.32%.

US Dollar Index Technical Analysis: A rate hike was not in the odds

The US Dollar Index (DXY) might have had its fun squeezing out some US Dollar bears in the process, though the road to substantial recovery is still long and looks very bumpy after this second reading of US GDP and sub-components. With the Fed and its Chairman Jerome Powell screaming for months that they remain data dependent, the data is now starting to signal that another hike might be needed. Not at all what markets want, nor what they are pricing in, with cold water set to be poured on market sentiment and the Fed controling the flow of how harsh or mild the disappointment will be.

To the upside, the 100-day Simple Moving Average (SMA) near 104.00 is being tested as its resistance got broken, though could still shape into a bull trap. Should the US Dollar be able to cross 104.60, 105.12 is the next key level to keep an eye on. One step beyond there comes 105.88, the high from November 2023. Ultimately, 107.20 – the high of 2023 – could even come back into scope, but that would be when markets reprice the timing of a Fed rate cut again, possibly delaying it to the last quarter of 2024.

Looking down, the 200-day Simple Moving Average at 103.74 has been broken twice recently, making it a weak support. The 200-day SMA should not let go that easily, so a small retreat back to that level could be more than granted. Ultimately, it will lose its force with the ongoing selling pressure and could fall to 103.16, the 55-day SMA, before testing 103.00.

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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