Strength for the Greenback After the Fed’s Statement

The dollar has held steady or advanced slightly in most of its pairs after the Fed kept the funds rate at 5.25-5.5% on Wednesday 20 September as expected. The main new information for traders from the press conference was the hint of one more hike by the end of the year, something which isn’t currently priced in. This article summarises the situation for monetary policy in the USA and briefly analyses the charts of gold and euro-dollar.

The Fed’s statement came with the familiar language of uncertainty, assessing new information and strong commitment to bring inflation back to 2% in the medium to long term. It also indicated that rates will remain higher for longer, which was fairly widely expected. However, traders were somewhat surprised by Dr Powell’s comment during the press conference that ‘we have more to do with rates’. That would appear to signal an upcoming hike, but traders aren’t pricing this in yet:

As of 22 September, fewer than a third of participants expect the Fed to call for a hike at its next meeting in November. The majority still expects the current 5.25-5.5% to be the peak of this cycle of tightening; however, the consensus for the first cut has now moved back to July 2024.

Overall, economic conditions in the USA are much less bad than had been anticipated around this time last year or in early 2023. Job data and GDP remain decent considering how high and how quickly the funds rate has gone up. The Fed can also highlight strong progress on inflation without resting on its laurels yet:

Although PCE moved up in July, that came in the context of an overall strong downtrend. It appears that the recent rise in the rate of inflation in the USA and various other countries is primarily due to gains by crude oil rather than other underlying factors like persistent high demand.

The Fed remains very cautious about economic projections. When asked whether people should expect a soft landing as the base case, Dr Powell was unusually direct with his answer: ‘No, I would not do that. I’ve always thought that the soft landing was a plausible outcome, that there was a path to a soft landing. It’s also possible that the path has narrowed and widened.’

This particular comment might drive traders to focus more closely on 27 September’s final GDP for the second quarter. The consensus on Friday 22 September was 2.2% against the second estimate of 2%. If that’s right, the dollar might stand to gain further as participants could start to price in another hike in November or December.

Gold, Daily

Gold’s volatility was around the average for a meeting of the Fed because the result was more-or-less a foregone conclusion, although traders do seem to be taking more seriously the chances of a hike in the fourth quarter. The yellow metal has generally faced headwinds this quarter as economic projections became less gloomy. Even though the tightening cycle elsewhere also seems to be nearing its end, ‘high for longer’ is likely.

The current sideways trend between the 23.6% and 38.2% weekly Fibonacci retracements seems likely to hold in the runup to GDP data. Volume hasn’t strongly returned from summer’s lull and the moving averages are bunched closely together. The clear rejection of $1,940 after the Fed’s statement with a very large wick might suggest further losses in the medium term. However, traders looking to sell need to be aware of the potential for a false breakout around $1,900, a key psychological support and the area of the 38.2% Fibo.

Euro-dollar, Daily

Euro-dollar reached a nine-month low last week amid the relative hawkishness from the Fed, growing likelihood that the ECB might pause hiking and the lacklustre PMI from the eurozone. Philip Lane, the ECB’s Chief Economist, specifically commented that pressure on inflation from pay hikes is starting to subside.

Euro-dollar’s downtrend is clearly still active but consolidation and possibly a small bounce seem favourable before another significant leg down. May’s intraday low around $1.06 hasn’t been broken yet and the area of the 100% Fibonacci retracement based on 2020’s strong uptrend is still in view. Oversold conditions have also been dominant over the summer. Traders highlighting the death cross of the 50 SMA from Bands below the 100 and 200 SMAs as evidence for negativity might do well to wait for an entry higher or use a sell limit, derisking the trade somewhat compared to entering around the current extreme.

The opinions in this article are personal to the writer. They do not reflect those of Exness or FX Empire.