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18 Dec 2024

US Dollar drifts as Fed decision looms

  • DXY trades in neutral fashion near 107.00 on Wednesday.
  • Market focused on incoming Fed dot plot and 2025 rate forecasts.
  • A 25 bps cut is already priced in.

The US Dollar Index, which measures the value of the USD against a basket of currencies, trades neutrally near the 107.00 mark on Wednesday as it consolidates ahead of the Federal Reserve (Fed) interest rate decision. Traders are keenly awaiting the dot plot to gauge the number of rate cuts envisioned in 2025. Despite a recent easing in the USD following profit-taking on Friday and new Chinese economic data, the Greenback holds steady, looking for direction as the Fed policy announcement nears.

Daily digest market movers: US Dollar stands flat as Fed decision takes center stage

  • The US Dollar stands flat as markets await the Federal Reserve’s rate decision, focusing on potential changes in the "dots" that project future interest rates.
  • Evolving economic conditions have inflation measured by the Consumer Price Index (CPI) rising from 2.4% in September to 2.8% in November, while growth remains solid and labor markets firm.
  • Markets expect a 25-basis-point rate cut, along with forecasts for three cuts in 2025, viewed as a neutral outcome. A hawkish surprise, with fewer cuts, could dampen risk sentiment, though a complete pause on cuts is unlikely.
  • Updated macro forecasts and dot plots are likely to tilt hawkish with stronger growth and stubborn inflation prompting fewer projected cuts.

DXY technical outlook: Indicators firm, but gains capped below resistance

Indicators recovered significant ground last week, yet they appear insufficient to push the index beyond the 107.00–108.00 area. At the start of the week, the Index retreated slightly, signaling momentum fatigue.

Still, the broader picture remains constructive if the DXY can hold above its 20-day Simple Moving Average. As traders await the Fed’s guidance, technical signals suggest a cautious but potentially supportive environment for the Greenback, barring any hawkish surprises that might fuel a breakout.

US Dollar FAQs

The US Dollar (USD) is the official currency of the United States of America, and the 'de facto' currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

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