The US dollar falls as the market digests the FOMC decision

VaselineSeptember 19, 2024

0 3 minutes read

The US dollar falls as the market digests the FOMC decision

The FOMC meeting ended with a 50 bp interest rate cut to a range of 4.75%-5.00%.
The Dot Plot suggests a gradual easing cycle that suggests three cuts in 2024.
Chairman Powell emphasized during the press conference that the Fed is in no rush.

The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, is trading near 100.70 on Thursday as the market digests the Federal Reserve’s (Fed) 50 basis point (bps) cut. The market overreacted to the news, boosting expectations for further easing despite the Fed’s efforts to signal a gradual easing cycle. On Thursday, the US released strong initial jobless claims numbers that stopped the USD bleeding.

The US economy is experiencing mixed signals, with signs of both deceleration and resilience. While some economic indicators suggest a slowdown, others indicate that activity remains robust. The Fed has indicated that the pace of future interest rate adjustments will be guided by incoming economic data, so the DXY index will be sensitive to incoming reports.

Daily Market Reasons: US Dollar Down, Market Prices Relax More

The FOMC cut rates by 50 bps on Wednesday, although the Dot Plot suggests a more gradual easing cycle ahead.
Despite the Fed’s efforts to play down market easing expectations, they have intensified.
After initially lowering expectations following the decision, the market is now considering a further 75 basis points of interest rate cuts by the end of the year.
The market anticipates further cuts of nearly 250 basis points over the next year, which would bring the federal funds rate significantly below neutral.
The Fed has released updated macro forecasts that show growth remains robust in Q3.
On the data front, US citizens who applied for unemployment insurance benefits reached 219,000 in the week ended September 14, below expectations and the previous weekly figure.
The seasonally adjusted advance unemployment rate was 1.2% and the 4-week moving average was 227.

DXY Technical Outlook: DXY under bear momentum, needs to recover 101.00

The DXY indicators remain bearish after losing the 20-day simple moving average (SMA). Selling traction is building, with the Relative Strength Index (RSI) trending lower below 50. The Moving Average Convergence Divergence (MACD) is showing lower green bars, indicating a dry move.

Supports are located at 100.50, 100.30 and 100.00, while resistance levels are at 101.00, 101.30 and 101.60.

Frequently asked questions about US dollars

The US dollar (USD) is the official currency of the United States of America and the “de facto” currency of a significant number of other countries where it is found in circulation alongside local banknotes. It is the world’s most heavily traded currency, accounting for more than 88% of total global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, as of 2022. After World War II world, the USD has taken over from the British pound as the world’s reserve currency. For most of its history, the US dollar was backed by gold, until the Bretton Woods Agreement in 1971, when the gold standard disappeared.

The most important factor influencing the value of the US dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to ensure price stability (inflation control) and to promote full employment. Its main tool for achieving these two objectives is the adjustment of interest rates. When prices rise too fast and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the value of the USD. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which affects interest rates.

In extreme situations, the Federal Reserve can also print more dollars and engage in 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 when credit has dried up because banks will not lend to each other (for fear of default). It is a last resort when simply lowering interest rates is unlikely to achieve the desired result. It was the Fed’s preferred weapon to combat the credit crunch that occurred during the Great Financial Crisis of 2008. This involves the Fed printing more dollars and using them to buy US government bonds, mainly from financial institutions . QE usually leads to a weaker US dollar.

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal of maturing bonds it holds in new purchases. It is usually positive for the US dollar.

VaselineSeptember 19, 2024

0 3 minutes read

Daily Market Reasons: US Dollar Down, Market Prices Relax More

DXY Technical Outlook: DXY under bear momentum, needs to recover 101.00

Frequently asked questions about US dollars

Vaseline

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