Market Data 
- US Dollar rises after UoM positive data.
- Consumer confidence improves, inflation expectations were mixed.
- FOMC cuts rates by 25 bps, economic growth remains solid.
The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, rose on Friday. This comes after positive University of Michigan data and the announcement that the Federal Open Market Committee (FOMC) lowered interest rates by 25 basis points on Thursday.
The Fed expressed optimism about economic growth but acknowledged easing labor market conditions. Despite the rate reduction, DXY has rebounded and could continue its upward momentum if the data continues coming in strong.
Daily digest market movers: US Dollar rises on Michigan sentiment data, FOMC decision
- The FOMC concluded its two-day meeting with an expected 25 bps rate cut, signaling continued easing amid concerns over global economic growth.
- Despite weak jobs data, other indicators suggest the US economy remains robust, with solid labor market conditions and growth forecasts above trend.
- The Atlanta Fed’s GDPNow model estimates Q4 GDP growth at 2.4%, while the New York Fed’s Nowcast model tracks it at 2.0%.
- Rising productivity is expected to support low inflationary economic growth, leading to higher real interest rates and currency appreciation in the long term.
- Consumer confidence improved in November with the University of Michigan’s Consumer Sentiment Index rising to 73 from 70.5 in October.
- The Current Conditions Index declined slightly to 64.4, while the Consumer Expectations Index climbed to 78.5.
- Inflation expectations remained low, with the one-year outlook edging down to 2.6% and the five-year outlook rising to 3.1%.
DXY technical outlook: DXY maintains bullish momentum, resistance at 105.50
The DXY index’s indicators retracted slightly on Thursday but maintained positive momentum by the end of the week. The Relative Strength Index (RSI) stands deep in positive territory, while the Moving Average Convergence Divergence (MACD) prints lower red bars.
The DXY has regained support at its 200-day SMA and completed a bullish crossover between the 200-day and 20-day SMAs. This suggests potential for further upward price action despite a recent pullback this week.
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.
