US Dollar trades flat after hot PPI figures, eyes on FOMC minutes.
- US Dollar continues to struggle to gain momentum.
- US PPI from September rose to 2.2% YoY, beating expectations
- The FOMC will release its minutes from the September meeting later in the session.
- Markets remain cautious amid the conflict between Israel and Hamas.
The US Dollar (USD) measured by the US Dollar DXY Index trades with mild losses after the release of hot Producer Price Index (PPI) figures and ahead of the Federal Open Market Committee (FOMC) minutes. In addition, the conflict in Palestine has escalated, which could make investors seek refuge in the green currency.
As the United States economic data doesn’t show evidence of a cool-down, the minutes from the September meeting from the FOMC will be closely monitored by investors to look for clues regarding the Federal Reserve's (Fed) next step. It's worth noting that in the last decision, the bank decided to hold rates steady at the 5.25-5.50% range, but the so-called “dot plot” revealed that most of the members are seeing high chances of an additional hike in this cycle. Also, projections revealed that rate cuts may be delayed, meaning that the Fed could maintain its restrictive policy at higher levels for longer.
Daily Digest Market Movers: US Dollar consolidates last week’s rally; resilient US economy and Middle East geopolitical tensions could reignite its bullish momentum.
- The US Dollar DXY index continues consolidating and trades neutral at 105.80.
- The September US Producer Price Index (PPI) rose to 2.2%, higher than the expected 1.6% and the same as the previous 2.2%.
- Investors will look for further clues of the Federal Reserve's (Fed) stance in the Federal Open Market Committee (FOMC) minutes, to be released later in the session.
- Regarding the last Fed forecast, the dot plot interest rate projections from the Fed remained at 5.6% for 2023, meaning higher chances of an additional 25 basis point (bps) hike.
- For 2024, the median Fed funds target rate was revised to 4.6% vs the 4.3% March projections, meaning that the Fed is delaying rate cuts.
- During the Press conference, Jerome Powell noted that monetary policy decisions will still depend on incoming data.
Technical analysis: US Dollar Index bullish momentum wanes, rejected by the 20-day SMA
The US Dollar Index DXY sees a neutral to bearish technical outlook for the short term, and the buyers fail to regain the 20-day Simple Moving Average (SMA), which could pave the way for further downside. On the daily chart, the Relative Strength Index (RSI) displays a negative slope near the 50 middle-point while the Moving Average Convergence Divergence (MACD) stands in negative territory, indicating that the bears hold the upper hand over the short term. However, the index is comfortably above the 100 and 200-day Simple Moving Averages (SMA), indicating that the bulls command the broader scale. As the sellers are gaining momentum, pushing the index below the 20-day average at 105.90, more downside may be on the horizon to continue consolidating the last week’s rally, with support lining up at 105.50, 105.30 and 105.00.
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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