Has FOMC Decision Dragged US Dollar Index Lower?

The US Dollar Index hit lowest level in almost three weeks on Fed’s dovish hike. The Federal Reserve’s decision came in line with 0.25% rate hike expectations but the dovish signals came in Jerome Powell’s remarks about easing inflation in the United States, these signals were most welcome by DXY bears.

Fed Chair Powell’s willingness for rate cuts, if needed, during late 2023 boosted the dollar’s downside bias in addition to Wednesday’s weaker US data hints.

US Dollar Index is holding lower grounds close to 100.90 as traders attempt to minimize their losses near the lowest levels since April 2022 during Thursday’s Asian session. The dollar’s performance versus the six major currencies also echoes the market’s cautious sentiment ahead of other key central bank events in the BoE and the ECB as well as Thursday’s US Nonfarm Payrolls data.

The DXY Index dropped the most in three weeks after the Fed’s Monetary Policy Statement suggested that the inflation “has eased somewhat but remains elevated”. The statement initially allowed the US dollar bears to take entries even as the US central bank announced a 0.25% Fed rate hike while matching the market’s forecasts.

The US dollar’s decline followed the Fed Chair Powell’s press conference as the policy hawk surprised markets by saying, “We can declare that a deflationary process has begun.” The policymaker also accepts the need for rate cuts during late 2023 if inflation comes down much faster. Powell also suggested that another two rate hikes are needed to reach the target.

Mixed US data such as ISM Manufacturing PMI dropped to the lowest levels since June 2020 with a significantly weak reading of 47.4 figure for January, versus 48.0 expected and 48.4 prior. Additionally; the ADP Employment Change retreated to a one-year low with 106K the latest figure compared to the expected 178K and the upwardly revised previous figure of 253K. On the contrary, JOLTS Job Openings rose to 11.012M in December, crossing 10.25M consensus and 10.44M prior readings.

Having this as a clear background, Wall Street rallied and the US 10-year Treasury yields fell the most in two weeks. The DXY traders are expected to wait for the monetary policy meetings by both the ECB and BoE to digest their outcomes. Traders and investors will also focus on the Q4’s US Preliminary Nonfarm Productivity, expected 2.4% versus 0.8% prior. And above all, Friday’s US jobs report for January will be key to decide on a clearer direction.

Technically; an obvious downside break of the May 2022 low of 101.30 keeps US dollar bears hopeful of touching the 100.00 psychological magnet.