Most Recent Article: US Dollar starts the week on the defensive, markets await PCE inflation data
- The US Dollar starts the week with a mixed performance.
- Traders are selling US Dollar on the back of Goolsbee's and Mester's comments.
- The US Dollar Index recovered on Friday, though not enough to change sentiment.
The US Dollar (USD) is starting to act like a loose canon with comments from US Federal Reserve member Austan Goolsbee from the Chicago Fed. Goolsbee said he is surprised about the risk on market reaction and said that the market has it all wrong. Markets meanwhile look to challenge the FED with several hedge funds and banks calling for a goldilocks scenario, while the Fed tries to get rates and inflation under controle.
On the economic front, the calendar is light at the beginning of the week. Still, some important releases are ahead towards its end, before markets wind down for the Christmas llull. On Thursday, the final estimate of the US Gross Domestic Product (GDP) for the third quarter could move markets ahead of Friday. On the very last day ahead of Christmas, the Personal Consumption Expenditure (PCE) Price Index – the Fed’s preferred inflation gauge – will be released, along with the Durable Goods numbers for November.
Daily digest Market Movers: Fed to whitstand markets
- Chicago Fed member Austan Goolsbee shakes the tree this Monday with some comments: He thinks both Powell and Williams are right, the economy can grow while inflation cools. Though markets are getting to far ahead of themselves when looking at the market reaction in the aftermath of the Fed's rate decision last week.
- Already two ECB members came out on Friday and this Monday, repeating the message from ECB Chairman Christine Lagarde that rate cuts are not on the table. The Euro does not react at all to the independent comments and repetition.
- Houthi rebels have again attacked a tanker in the Red Sea, forcing shipping companies to avoid the area and ships rerouted via longer routes.
- The Financial Times has published an article that shows that several developed countries, even Europe and the US, are struggling with higher-than-normal amounts of bankruptcies in businesses. In some countries like France and Japan, the ratio is up over 30% from its normal annual average. In some Nordic countries like Sweden and Finland, rates have exceeded levels not seen since 2008-2009’s global financial crisis.
- Main takeaway from last Friday were the preliminary Purchasing Managers Index (PMI) numbers for December: for the services sector, the European PMIs fell further into contraction, while US and UK PMIs went higher. With the ECB not committing to any cuts in 2024, European business activity could further deteriorate. Meanwhile, a soft landing scenario in the US could well be in the cards with the Fed having all tools at its disposal to support the economy and keep inflation under control.
- At 15:00 GMT, the National Association of Home Builders was release for December. Previous was at 34, with 37 just a touch expectations of 36.
- The US Treasury Department is heading to markets to place a short-term 3-month and a 6-month bill at 16:30 GMT.
- A red start of this week for equities with Asia leading the decline. In Europe, the main indices are giving back some gains from last week, with the German Dax down 0.50%. US Futures are flat.
- The CME Group’s FedWatch Tool shows that markets are pricing in an 89.7% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 10.3% expect the first cut already to take place.
- The benchmark 10-year US Treasury Note trades near 3.95%, and starts the week with another few basis points lower.
US Dollar Index Technical Analysis: Pushback turbulence
From a technical perspective, the DXY US Dollar Index could be heading to 100.00 in the very short-term when looking at the weekly chart. Traders will see several rejections over the past four weeks against the 55-week Simple Moving Average (SMA) near 104.00. This firm rejection – with a substantial close lower last week – could mean that US Dollar bulls have given up for now, with the US Dollar Index (DXY) set to drop lower into the first week of 2024.
Still, US Dollar bulls could make a turnaround should the economic data this week provide upbeat surprises. On the daily chart, look for 103.00 as the first level to keep an eye on. Once trading above there, the 200-day SMA at 103.50 is the next important level to get to in its recovery.
To the downside, the DXY is due to test the next pivotal at 101.70, the low of August 4 and 10. Once broken, look for 100.82, which aligns with the bottoms from February and April. Should that level snap, nothing will stand in the way of DXY heading to the sub-100 region.
Dot Plot FAQs
What is the Federal Reserve “Dot Plot”?
The “Dot Plot” is the popular name of the interest-rate projections by the Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed), which implements monetary policy. These are published in the Summary of Economic Projections, a report in which FOMC members also release their individual projections on economic growth, the unemployment rate and inflation for the current year and the next few ones. The document consists of a chart plotting interest-rate projections, with each FOMC member’s forecast represented by a dot. The Fed also adds a table summarizing the range of forecasts and the median for each indicator. This makes it easier for market participants to see how policymakers expect the US economy to perform in the near, medium and long term.
When does the Federal Reserve publish the “Dot Plot”?
The US Federal Reserve publishes the “Dot Plot” once every other meeting, or in four of the eight yearly scheduled meetings. The Summary of Economic Projections report is published along with the monetary policy decision.
Why is the “Dot Plot” important for markets?
The “Dot Plot” gives a comprehensive insight into the expectations from Federal Reserve (Fed) policymakers. As projections reflect each official’s projection for interest rates at the end of each year, it is considered a key forward-looking indicator. By looking at the “Dot Plot” and comparing the data to current interest-rate levels, market participants can see where policymakers expect rates to head to and the overall direction of monetary policy. As projections are released quarterly, the “Dot Plot” is widely used as a guide to figure out the terminal rate and the possible timing of a policy pivot.
How does data in the “Dot Plot” affect the US Dollar?
The most market-moving data in the “Dot Plot” is the projection of the federal funds rate. Any change compared with previous projections is likely to influence the US Dollar (USD) valuation. Generally, if the “Dot Plot” shows that policymakers expect higher interest rates in the near term, this tends to be bullish for USD. Likewise, if projections point to lower rates ahead, the USD is likely to weaken.
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