Market Data 
- USD rebounds after the Federal Reserve holds rates steady at the 5.25%-5.50% range.
- FOMC members revised their interest rate protections of 2024 to the upside.
- Chair Powell’s emphasis on labor market strength underscores the Fed’s cautious approach.
On Wednesday, the US Dollar Index (DXY) saw an upward trend, following a more hawkish than expected interest rate projections revisions by the Federal Open Market Committee (FOMC). The Dollar managed to clear most of its losses and jump to 104.50 following the softer-than-expected Consumer Price Index (CPI) figures from May which made the index fall to a low of 104.30.
In the highly anticipated two-day FOMC meeting, which concluded on Wednesday, the committee decided to hold the rates steady at 5.25%-5.50%, along with revised, higher-than-expected upward revisions of interest rates. While the decision buoyed the USD, it slightly cooled the enthusiasm for gold and stocks.
Daily Digest Market Movers: DXY reacts positively to hawkish Fed rate revisions
- The Fed’s median projection for the federal funds rate has been revised upward to 5.1% by the end of 2024, reflecting that the Fed demands additional evidence of inflation coming down.
- In an upward revision, the Fed’s 1-year interest rate outlook rose to 4.1%, up from 3.9%.
- The 2-year rate outlook remained steady at 3.1%, while the long-term rate outlook rose to 2.8% from 2.6%.
- In the presser, Chair Powell emphasized the labor market’s strength and reassured the markets of the Federal Reserve’s preparedness to adjust policy according to the evolving economic data.
- Despite the decision to hold the rates steady, the reassessment of the rate path forecast indicates a longer timeline for potential rate cuts.
DXY Technical Analysis: Bulls regain control and recover SMAs
Following the hawkish Fed stance, the indicators on the intra-day outlook recovered but remained in negative area on the daily charts. The index also crossed back above the key support point of 104.50, intensifying the bullish outlook as it now trades above the 20, 100, and 200-day Simple Moving Average (SMA).
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.
