- FOMC meeting ended with 50 bps interest rate cut to the 4.75%-5.00% range.
- The Dot Plot suggests a gradual easing cycle that hints at three cuts in 2024.
- Chair Powell stressed during his presser that the Fed is not in a rush.
The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, is trading flat 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, intensifying expectations of further easing despite the Fed’s efforts to indicate a gradual easing cycle. On Thursday, the US released strong Initial Jobless Claims figures, which stopped the USD’s bleeding.
The United States 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 digest market movers: US Dollar declining, market pricing in more easing
- FOMC cut rates by 50 bps on Wednesday, although the Dot Plot suggests a more gradual easing cycle going forward.
- Despite the Fed’s efforts to push back against market easing expectations, they have intensified.
- After initially lowering its expectations following the decision, the market is now factoring in an additional 75 basis points of rate cuts by the end of the year.
- The market anticipates close to 250 basis points of further cuts over the next year, which would bring the fed funds rate significantly below the neutral level.
- Fed released updated macro forecasts, which show that growth remains robust in Q3.
- On the data front, US citizens who newly applied for unemployment insurance benefits reached 219K in the week ending September 14, below expectations and the previous weekly figure.
- Advance seasonally-adjusted insured unemployment rate was 1.2%, and the 4-week moving average was 227.
DXY technical outlook: DXY under bearish momentum, must recover 101.00
The DXY index indicators remain bearish, having lost the 20-day Simple Moving Average (SMA). Selling traction is mounting with the Relative Strength Index (RSI) trending downward below 50. The Moving Average Convergence Divergence (MACD) is printing lower green bars, indicating a shift to bearishness.
Supports are located at 100.50, 100.30 and 100.00, while resistance levels are at 101.00, 101.30 and 101.60.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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