Dollar Slides as Rate Hike Expectations Wane
In a surprising turn of events, the US Dollar faltered as hopes for a peak in US interest rates grew stronger, following the Federal Reserve’s decision to leave them unchanged. While the funds rate target ceiling stands at a 22-year high of 5.5%, Fed Chair Jerome Powell implied that the risks of hiking rates too aggressively or being overly cautious have now balanced out. This sentiment was further emphasized by the decline in US Treasury yields, hinting that rate hikes for the year might be over.
Following the monetary policy meeting, the Fed announced that it would maintain interest rates for the second consecutive time. Powell, in a subsequent press conference, did not dismiss the possibility of another rate hike come December. Interestingly, he noted that cuts are not in the immediate pipeline. Inflation, which the Fed has been keen to stabilize at 2%, still has a journey ahead, Powell remarked. The central bank acknowledged that the third quarter saw a strong expansion in economic activity and that the labor market gains were robust, despite with a slight easing.
Market Interpretations and Reactions
Markets perceived the Fed’s stance as an implicit nod to the low probability of a rate increase in December. Following this, equities surged, risk-sensitive currencies rebounded, and the ten-year Treasury yields saw a 23-point drop from Wednesday’s peaks. The dollar index experienced a dip of 0.1% to 106.41. Additionally, other major currencies like the euro, Swiss franc, and yen saw upward movements. The yen, in particular, rebounded after the Bank of Japan relaxed its yield curve control policy earlier this week.
Global Central Banks on Hold
Similar sentiments were echoed globally. The Bank of England (BoE), for instance, held its rates at a 15-year peak. This was amidst their battle against the surging inflation rates, the highest among the major affluent economies. The Bank Rate, after 14 consecutive hikes, remained at 5.25%. Recent data has shown no significant signs of persistent inflation that might prompt further tightening, implying that the BoE, like the Fed and the European Central Bank, is now in a holding pattern regarding rate hikes.
Short Term Forecast
In light of these factors, the near-term outlook for the US Dollar Index appears bearish, with potential for further downside as markets digest the implications of a halted rate-hiking cycle by the Federal Reserve.
The US Dollar Index (DXY) currently stands at 105.836. This places the index above both its 200-day moving average of 103.483 and its 50-day moving average of 105.626, signaling bullish momentum in both the short and long term.
However, its proximity to the 50-day average suggests that it is approaching a potential test of this key level. Should the index remain above this average, it would reinforce the current bullish sentiment. On the other hand, a breach below the 50-day average might raise caution among traders regarding a potential short-term momentum shift.
Given the distance from the 200-day moving average, this could signal the start of an acceleration to the downside.