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US Dollar’s Reaction to Fed Rate Decision: Analysis

US dollar’s reaction to upcoming Fed rate decision. How will market dynamics shape the greenback’s trajectory? Analysis inside.

Key Points

  • The US dollar’s short-term uptrend stays intact as the FOMC meeting approaches.
  • Expectations point to the Fed maintaining unchanged rates while placing a focus on the Statement of Economic Projection.
  • The Summary of Economic Projections (SEP) will be crucial in assessing the greenback’s future, especially concerning 2023 and 2024 policy rate forecasts.

US Dollar’s Reaction to Upcoming Fed Rate Decision-Scenarios & Analysis

US Dollar’s Current Uptrend

The US dollar is currently experiencing a short-term uptrend in anticipation of the upcoming Federal Open Market Committee (FOMC) meeting. Market pricing based on the CME FedWatch tool widely anticipates that the Federal Reserve will maintain the federal funds rate steady at its meeting on September 19-20. Several factors support this expectation, including moderating core inflation (despite a recent uptick in headline CPI), cooling labor market conditions, and a stabilizing housing market.

Fed Chair Powell’s Balanced Approach

Federal Reserve Chair Jerome Powell is likely to provide a balanced assessment, emphasizing data-dependency regarding the near-term policy path. His approach may resemble the message delivered at Jackson Hole last month, where he hinted at the possibility of further tightening measures to address persistently high inflation and above-trend economic growth.

A significant question looms – Is the Fed finished with its rate hikes? Recent robust macroeconomic data increases the chances of an economic resurgence, potentially leading to renewed inflationary pressures. While the September rate decision appears almost certain, the November meeting could present a closer call. In this context, the payroll and Consumer Price Index (CPI) data for the following month will be pivotal ahead of the November 1 FOMC meeting.

Focus on the Summary of Economic Projections (SEP)

In the upcoming week, the primary focus will be on the Summary of Economic Projections (SEP), released alongside the September FOMC statement. Of particular note is the potential for the 2023 median policy rate to show another 25 basis-point hike. This aligns with the June assessment. Additionally, heightened interest will be observed regarding an upward revision in the 2024 median policy rate forecast. In June, analysts previously projected this rate to be at 4.6%.

From a market perspective, the SEP could play a pivotal role. A 25 basis-point upward shift would still leave a significant gap compared to the current dovish 2024 market pricing. This contrast could prompt a reevaluation of the dovish market outlook for the upcoming year, potentially propelling the US dollar globally. Conversely, if 2024 median policy rate projections remain unchanged, the US dollar’s rally may take a temporary pause. However, any retreat could be short-lived, given the strong performance of the US economy relative to the rest of the world.

DXY Index’s Short-Term Bullish Momentum

The short-term bullish momentum of the DXY Index (USD index) has remained intact since July, characterized by higher highs and higher lows. This trend, combined with breaks above crucial resistance levels, reinforces the short-term uptrend. The index is currently testing a formidable resistance level at approximately 106.00, corresponding to the March high. A decisive breakthrough beyond 106.00, even as momentum has plateaued, would indicate a substantial bullish outlook for the US dollar. Conversely, only a decline below the 102.50-103.00 range would raise concerns about the DXY Index potentially reaching its peak.

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