- US Treasury yields are declining but remain at multi-month highs.
- Investors are focusing on Fed Chair Powell’s hawkish stance.
The US Dollar Index (DXY) declined below 106.00 during the American session. However, the outlook for the Greenback is positive, as hawkish bets on the Federal Reserve (Fed) might act as a cushion. In addition, Wednesday’s downward movements may be seen as a slight correction.
The US economy is seeing sticky inflation and robust growth. Fed Chair Powell’s hawkish stance shows that instead of another rate hike, the Fed favors market tightening through higher yields and wider spreads, which strengthens the USD. However, with financial conditions still loose, further tightening is required and Powell commented on Tuesday that the monetary policy may need additional time to work.
- The Fed’s Beige Book showed that economic activity expanded slightly, on balance, since late February.
- Federal Reserve Chair Powell was seen hawkish on Tuesday and warned that there is little progress on inflation. He also stated that the bank remains data-dependent.
- The possibility of a rate cut in the next meeting in June stands at around 15%, a huge drop compared to the previous week’s 60%. Also, the chances for a July rate cut have fallen below 50%.
- The first-rate cut is expected to take place in September with a 95% probability, followed by another in December at a 70% probability.
- The US Treasury yields for the 2-year, 5-year, and 10-year Treasury bonds are currently standing at 4.93%, 4.63%, and 4.61%, respectively, down on the day. Despite the recent decrease, the 2-year and 10-year yields are at their highest since November.
On the daily chart, the Relative Strength Index (RSI) continues exhibiting overbought conditions, hinting at an upcoming correction or consolidation phase. The Moving Average Convergence Divergence (MACD) shows decreasing green bars, implying that the buying momentum is losing steam and that the bears may soon take charge.
However, the pair is comfortably positioned above its 20, 100,and 200-day Simple Moving Averages (SMAs), indicating the bulls’ dominance in the current scenario. This suggests a positive medium to long-term outlook, with the bulls defending their ground despite the technical indicators pointing toward a short-term bearish influence.
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.
