US Dollar Starts Policy Decision’s Week with Gains

The dollar is seeing gains ahead of FOMC decision. The DXY Index is 0.16% up on the day, trading at 103.612 at the time of writing. As for the broader context for this performance, FOMC decision will attempt to maintain balancing between inflation and growth.

Despite recent gains, the DXY remains below key moving averages, indicating persistent bearish sentiment. Technical indicators, RSI and MACD, hint at a potential shift in momentum towards the bulls, but selling pressure is still considered strong.

Overall, the upcoming FOMC meeting is likely to influence the USD, but the impact may be tempered by conflicting data and a wait-and-see approach from the Fed. The focus remains on the Fed’s future policy direction and its impact on inflation and economic growth.

The upcoming Federal Open Market Committee meeting on Wednesday is a key event for the US dollar. Analysts expect a muted immediate reaction, with the focus on the Fed’s projections for interest rates and other economic indicators.

Limited or No Dot Plot Change

Analysts also anticipate an unchanged “Dot Plot,” which reflects individual FOMC members’ interest rate expectations. However, a hawkish revision indicating potentially slower rate cuts is considered more likely than a dovish one. This hawkish tilt could lead to some appreciation in the USD, but the upside is limited.

Cautious Optimism on Disinflation Tempers Dollar Strength:

While acknowledging potential upside risks, analysts highlights signs of disinflation, which could weaken the dollar. This suggests the Fed may be nearing a turning point in its monetary policy.

Data Dependence Delays Larger Dollar’s Moves:

The Fed’s stance is likely to remain data-dependent, meaning concrete decisions on rate cuts may be postponed until key US economic data for March is released in April. This delay could prevent significant fluctuations in the dollar and broader foreign exchange market until then.

Near-Term Outlook: Modest Dollar Strength Expected

Analysts predict a modest rise in the USD leading up to the FOMC announcement. The US Dollar Index is anticipated to close the week near 104.00.

Key Factors Influencing the USD:

Fed Policy: Investors are closely watching the Fed’s stance on interest rates and future easing cycles. Current projections suggest a first rate cut in June, with a full cut by July.

Inflation and Labour Market: Sticky inflation remains a concern, while weak labour market data creates a balancing act for the Fed.

Treasury Yields: Rising Treasury yields are currently supporting the USD, with yields at 4.75% for the 2-year, 4.35% for the 5-year, and 4.33% for the 10-year.