US Dollar finds nirvana after volatile week with Fed Powell reassuring markets on his term

The US Dollar finds support on Friday after a volatile week and trades sideways.
Jerome Powell reassured markets and reporters on his future as Fed Chairman.
The US Dollar index steadies in the 104-region, looking for a fresh direction next week.

The US Dollar (USD) is trading sideways around the mid-104.00 region on Friday after founding support as investors digest the Federal Reserve’s (Fed) decision to lower its monetary policy rate by 25 basis points to the 4.50%-4.75% range on Thursday. The rate cut event completely faded to the background, with reports eager to ask if Fed Chairman Jerome Powell needs to fear for his job now that President-elect Donald Trump will come to the White House in January. Powell was quite blunt and direct in saying that he will not resign and cannot be fired, underlining that the Fed is an independent body from politics in the US.

The US economic calendar sees the release of the University of Michigan’s preliminary November report on Friday. As always, a good guide and leading indicator of how consumer sentiment in the US is holding up. The inflation expectation of US consumers in the report will be a key factor after several head economists and analysts have predicted inflation will be one of the major concerns for the Trump presidency.

Daily digest market movers: Michigan not expected to already factor in Trump effect

The Federal Reserve decided on Thursday to lower its monetary policy rate by 25 basis points to the 4.50%-4.75% range after the Bank of England (BoE) made the same move towards 4.75% earlier that day.
During the press conference after the meeting, Fed Chairman Powell was asked about possible resignations or threats to his job under President-elect Trump. Powell reiterated that the Fed is an independent institute that does not follow politics and only looks at US data and its mandates. The Fed Chairman even got annoyed at one point with the question and simply said “No!” to the question, Reuters reports.
At 15:00 GMT, the University of Michigan will release its preliminary reading for November. Consumer Sentiment is expected to tick up to 71 from 70.5 in the previous month. Inflation expectations, which were at 3% in October, have no consensus view.
At 16:00 GMT, Federal Reserve Governor Michelle Bowman participates in a conversation about banking at a symposium organized by the University of Mississippi School of Business.
European equities have a clear off-day with losses near 1% intraday. US futures are looking bleak as well ahead of the US opening bell.
The CME FedWatch Tool is pricing in another 25 basis points (bps) rate cut by the Fed at the December 18 meeting by 71.3%. A smaller 28.7% chance is for rates to remain unchanged.
The US 10-year benchmark rate trades at 4.29%, tumbling lower from this week’s high at 4.47%.

US Dollar Index Technical Analysis: Powell as last line of defense

The US Dollar Index (DXY) eased on Thursday after its steep move higher earlier in the week. That move came on the back of comments from Fed Chairman Jerome Powell that he is here to stay and will stay even when President-elect Donald Trump takes office. This reassures markets that stability will be present on the monetary policy front, and logical action will be taken to ensure the US economy does not overheat or head into hyperinflation.

The first level to watch out for on the upside is 105.53 (April 11 high), a very firm cap resistance, with 105.89 (May 2 high) just above. Once that level is broken, 106.52, the high of April and a double top, will be the last level standing before starting to talk about 107.00.

Last week’s peak at 104.63 did not do a great job in offering some support for the fade on Thursday. On the downside, the round level of 104.00 and the 200-day Simple Moving Average (SMA) at 103.86 should refrain from sending the DXY any lower.

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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