- The US Dollar Index trades flat after dipping to a five-day low on Tuesday around 99.20.
- Headlines on China and the US, whose officials are set to meet this weekend in Switzerland, is driving some sigh of relief.
- The US Dollar Index remains stuck in a wait-and-see range as the Federal Reserve rate decision looms.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, trades broadly flat on Wednesday at around 99.40 after printing a fresh five-day low on Tuesday and looks to be on pause for now. Traders are meanwhile assessing news about progress between China and the US regarding trade talks and brace for the Federal Reserve (Fed) interest-rate decision later this Wednesday. Not much is expected from this rate decision as markets almost fully price in that the Fed will keep rates stable despite pressure from US President Donald Trump to cut them.
On the geopolitical front, tensions flared up between Pakistan and India. Pakistan said it shot down five Indian airplanes and took soldiers prisoner in retaliation for Indian military strikes early on Wednesday. The prospect of a war between the nuclear-armed neighbors should see some safe haven inflow towards US bonds or Gold, for example, although any added haven demand is, at this stage, being canceled out by the trade talks optimism, Bloomberg reports.
Daily digest market movers: Fed is not gonna bow for Washington
- US Treasury Secretary Scott Bessent and US Trade Representative Jamieson Greer will travel to Switzerland for trade talks with the Chinese delegation, led by Vice Premier He Lifeng, this weekend. Both parties are seeking to de-escalate a tariff standoff that has threatened to hammer both economies. In this first phase, no trade talks as such will be held, though rather talks to de-escalate the situation, according to Bessent on Fox News.
- At 18:00 GMT, the Fed rate decision will be released with a joint statement. Expectations are for the Fed to maintain its policy rate at the 4.25%-4.50% range.
- At 18:30 GMT, Fed Chairman Powell will take the stage to comment on the recent policy rate decision and take questions from reporters in the room.
- Equities are quite positive, although no real rallies are materializing. Gains are kept to a minimum, with a roughly 0.5% advance for European and US indices.
- The CME FedWatch tool shows the chance of an interest rate cut by the Federal Reserve in June’s meeting at 28.3%. Further ahead, the July 30 decision sees odds for rates being lower than current levels at 74.2%.
- The US 10-year yields trade around 4.32%, steady for now after a four-day straight rally higher.
US Dollar Index Technical Analysis: Big break starts to take shape
The US Dollar Index (DXY) is not really moving or responding to the surprise headline and communication from the China and US administrations on trade talks set to start on Saturday. Markets probably quickly read through the headlines and behind the news that these talks are instead to be seen as two desperate parties joining each other to see how to ease the impacts on the economy. This also shows how the US economic performance is probably starting to struggle because it lacks China’s supplies, which might filter through in another leg lower in the DXY once US economic data confirms it.
On the upside, the DXY’s first resistance comes in at 100.22, which supported the Index back in September 2024, with a break back above the 100.00 round level as a bullish signal. A firm recovery would be a return to 101.90, which acted as a pivotal level throughout December 2023 and again as a base for the inverted head-and-shoulders (H&S) formation during the summer of 2024.
On the other hand, the 97.73 support could quickly be tested on any substantial bearish headline. Further below, a relatively thin technical support comes in at 96.94 before looking at the lower levels of this new price range. These would be at 95.25 and 94.56, meaning fresh lows not seen since 2022.
US Dollar Index: Daily Chart
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.
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