Market Data 
- The US Dollar is under pressure as markets are still divided over the size of the Fed rate cut.
- Traders will sit on their hands until the decision is out, followed by the Fed’s Chair Powell press conference.
- The US Dollar Index retraces on Wednesday after the prior day’s small bounce.
The US Dollar (USD) retraces and trades below 101.00, as measured by the US Dollar Index (DXY), ahead of the US Federal Reserve (Fed) interest rate decision on Wednesday. The DXY is under pressure near the yearly lows and faces a key moment, with the Federal Open Market Committee (FOMC) ready to answer how much the Fed needs to cut interest rates. Besides Fed Chairman Jerome Powell’s speech and press conference, the focus will be on the Summary of Economic Projections (SEP), or the Fed’s Dot Plot or Philips curve, where every FOMC member gets a chance to communicate where they see the Fed policy rate move to in the near future. The number of projected rate cuts could be vital in guiding markets in their expectations.
On the economic data front, some relatively light data points are not set to move the needle ahead of the Fed decision on Wednesday. Markets are still split between a 25 or 50 basis points interest rate cut, so guidance from Fed Chairman Jerome Powell during his speech could shed a completely different light on the matter and might result in a knee-jerk reaction.
Daily digest market movers: Data did nothing
- The main set of economic data on Wednesday were the monthly Building Permits and Housing Starts data. Monthly Building Permits jumped to 1.475 million in August from 1.406 million in July. Monthly Housing Starts were a beat on estimate with 1.356 million in August against 1.238 million previously.
- At 18:00 GMT, the Fed will release its Interest Rate Decision, the Monetary Policy Statement, and the Summary of Economic Projections.
- At 18:30 GMT, Fed Chairman Jerome Powell will take the stage with a statement followed by a Q&A session.
- Asian equities closed off positive for this Wednesday. European equities are a bit less shure on the Fed and are trading at minor losses. US futures are flat ahead of the opening bell.
- The CME Fedwatch Tool shows it will be a very close call this Wednesday with a 25 basis points (bps) interest rate cut probability at 37.0%. Meanwhile, the chances of a 50 bps cut are at 63%. For the November 7 meeting, another 25 bps cut (if this Wednesday is a 25 bps cut) is expected by 22.4%, while there is a 51.6% chance that rates will be 75 bps (25 bps + 50 bps) and a 26.0% probability of rates being 100 (25 bps + 75 bps) basis points lower compared to current levels.
- The US 10-year benchmark rate trades at 3.68%, bounces off the 15-month low of 3.60%.
Economic Indicator
Fed Interest Rate Decision
The Federal Reserve (Fed) deliberates on monetary policy and makes a decision on interest rates at eight pre-scheduled meetings per year. It has two mandates: to keep inflation at 2%, and to maintain full employment. Its main tool for achieving this is by setting interest rates – both at which it lends to banks and banks lend to each other. If it decides to hike rates, the US Dollar (USD) tends to strengthen as it attracts more foreign capital inflows. If it cuts rates, it tends to weaken the USD as capital drains out to countries offering higher returns. If rates are left unchanged, attention turns to the tone of the Federal Open Market Committee (FOMC) statement, and whether it is hawkish (expectant of higher future interest rates), or dovish (expectant of lower future rates).
Next release: Wed Sep 18, 2024 18:00
Frequency: Irregular
Consensus: 5.25%
Previous: 5.5%
Source: Federal Reserve
US Dollar Index Technical Analysis: Toss of a coin
The US Dollar Index (DXY) is set to either stick to its range for quite a time longer or finally break out of this rud it has been for nearly a month. The Fed rate decision on Wednesday is the catalyst that markets seek to finally break out of a certain consolidation phase. With the split conviction on the size of the interest rate cut, the risk is that a knee-jerk reaction could end up with the DXY opening Thursday still in the same tight range between 100.62 and 101.90.
The upper level of the recent range is 101.90. Further up, a steep 1.2% uprising would be needed to get the index to 103.18, with the 55-day Simple Moving Average (SMA) at 102.82 on the way. The next tranche up is very misty, with the 200-day SMA at 103.80 and the 100-day SMA at 103.84, just ahead of the big 104.00 round level.
On the downside, 100.62 (the low from December 28, 2023) holds strong and has already made the DXY rebound two times in recent weeks. Should it break, the low from July 14, 2023, at 99.58, will be the next level to look out for. If that level gives way, early levels from 2023 are coming in near 97.73.
US Dollar Index: Daily Chart
Dot Plot FAQs
The “Dot Plot” is the popular name of the interest-rate projections by the Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed), which implements monetary policy. These are published in the Summary of Economic Projections, a report in which FOMC members also release their individual projections on economic growth, the unemployment rate and inflation for the current year and the next few ones. The document consists of a chart plotting interest-rate projections, with each FOMC member’s forecast represented by a dot. The Fed also adds a table summarizing the range of forecasts and the median for each indicator. This makes it easier for market participants to see how policymakers expect the US economy to perform in the near, medium and long term.
The US Federal Reserve publishes the “Dot Plot” once every other meeting, or in four of the eight yearly scheduled meetings. The Summary of Economic Projections report is published along with the monetary policy decision.
The “Dot Plot” gives a comprehensive insight into the expectations from Federal Reserve (Fed) policymakers. As projections reflect each official’s projection for interest rates at the end of each year, it is considered a key forward-looking indicator. By looking at the “Dot Plot” and comparing the data to current interest-rate levels, market participants can see where policymakers expect rates to head to and the overall direction of monetary policy. As projections are released quarterly, the “Dot Plot” is widely used as a guide to figure out the terminal rate and the possible timing of a policy pivot.
The most market-moving data in the “Dot Plot” is the projection of the federal funds rate. Any change compared with previous projections is likely to influence the US Dollar (USD) valuation. Generally, if the “Dot Plot” shows that policymakers expect higher interest rates in the near term, this tends to be bullish for USD. Likewise, if projections point to lower rates ahead, the USD is likely to weaken.
