Forex Today: Greenback churns as Fed rate call looms
Investor sentiment is grinding out worry lines in the charts, pushing major currency pairs into near-term midranges as the Federal Reserve’s (Fed) last rate call of 2024 approaches for a landing on Wednesday, with a smattering of other key central banks slated to make appearances this week as well.
Here’s what you need to know on Wednesday, December 18:
The US Dollar Index (DXY) chewed a circle into the chart paper on Tuesday with bids hanging out near the 107.00 handle. US Retail Sales figures lurched higher to 0.7% MoM, stoking some mild concern among investors that maybe the Fed doesn’t need to pursue an aggressive rate-cutting strategy after all, especially when counting a recent uptick in inflation metrics. Despite this, markets are still broadly pricing in a third straight rate cut from the Fed on Wednesday, with 95% odds favoring a 25 bps rate trim according to the CME’s FedWatch Tool.
EUR/USD shuddered and slipped back below the 1.0500 handle on Tuesday, stepping back from a four-day high of 1.0534 and shedding one-fifth of one percent against the Greenback. EU-centric economic data remains limited this week, leaving Fiber traders at the mercy of broad-market flows from the US Dollar. European PMI figures for December largely exceeded expectations earlier this week. However, Services PMI surveys remain stuck in contraction territory, leaving optimistic Euro bidders flummoxed by concerns over a deepening economic slowdown across Europe.
GBP/USD caught some lift to climb back above the 1.2700 handle, further paring away recent losses and extending Cable into a two-day bullish recovery. The pair has been battling a messy back-and-forth around the 1.2600 region since declining into the neighborhood in November, but now Pound Sterling traders are looking for a leg up ahead of a batch of key events from the UK side. UK Consumer Price Index (CPI) inflation figures are due early in the Wednesday London market session, and will be followed by the Bank of England’s (BoE) latest rate call, slated for Thursday and widely expected to announce a hold on rate cuts to wrap up the year.
USD/JPY pulled back on Tuesday, pulling away from the week’s early high of 154.50 and slipping back below 153.50, snapping a six-session winning streak for the Greenback in the process. The Bank of Japan (BoJ) has its own rate call scheduled for sometime early Thursday. The BoJ is broadly expected to keep rates on hold yet again in December, and investors are looking to understand exactly what conditions would convince the hyper dovish Japanese central bank to raise interest rates again.
Economic Indicator
Fed Interest Rate Decision
The Federal Reserve (Fed) deliberates on monetary policy and makes a decision on interest rates at eight pre-scheduled meetings per year. It has two mandates: to keep inflation at 2%, and to maintain full employment. Its main tool for achieving this is by setting interest rates – both at which it lends to banks and banks lend to each other. If it decides to hike rates, the US Dollar (USD) tends to strengthen as it attracts more foreign capital inflows. If it cuts rates, it tends to weaken the USD as capital drains out to countries offering higher returns. If rates are left unchanged, attention turns to the tone of the Federal Open Market Committee (FOMC) statement, and whether it is hawkish (expectant of higher future interest rates), or dovish (expectant of lower future rates).
Read more.Next release: Wed Dec 18, 2024 19:00
Frequency: Irregular
Consensus: 4.5%
Previous: 4.75%
Source: Federal Reserve
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.