- US Housing Starts and Building Permits from February beat expectations.
- All eyes are now on the Fed’s updated Dot Plot on Wednesday, an interest rate pause is already priced in.
- US Treasuries are edging downward but remain at multi-week highs.
The US Dollar Index (DXY) is fluctuating around 104.00, registering gains ahead of the impending Federal Open Market Committee (FOMC) meeting on Wednesday. This marks the highest level since March 1. Markets await fresh guidance, and if the Federal Reserve’s (Fed) updated Dot Plot or Chair Jerome Powell provides any dovish signals, the USD may resume its downside action.
In the meantime, Fed officials remain cautious about rushing too soon to start cutting as inflation remains sticky, which seems to also provide a cushion to the USD. The fresh guidance from Wednesday and incoming data will continue dictating the pace of the Greenback for the short term.
- Housing Starts in February reported by the US Census Bureau demonstrated a 10.7% MoM increase, rebounding from a -12.3% reading in the previous report.
- Building Permits (Feb) came in at 1.521M, higher than the 1.425M expected.
- The market currently anticipates the Fed remaining on its hawkish path, factoring in a 10% likelihood of a rate cut in May and a 65% chance in June. However, those odds may change after Wednesday’s FOMC decision.
- The 2-year yield is currently trading at 4.70%, while the 5-year yield stands at 4.31% and the 10-year yield at 4.30%.
The technical indicators on the daily chart reflect a positive bias. The Relative Strength Index (RSI), bearing a positive slope in positive territory, signals an augmenting bullish strength. Simultaneously, the histogram of the Moving Average Convergence Divergence (MACD) is showcasing rising green bars, further affirming the dominance of buying momentum.
The Simple Moving Averages (SMAs) further bolster this bullish outlook. The DXY is now positioned above the convergence of 20,100 and 200-day Simple Moving Averages (SMAs) near the 103.50-70 area, which suggests that bulls are controlling the broader outlook.
Considering these signals, a snapshot of the current technical outlook implies that overall, bulls are gaining ground. However, bulls must build strong support above the mentioned SMAs to consolidate their movements.
Fed FAQs
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.
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.
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.
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.