The U.S. Dollar: What Impact Will The Fed’s Key Rate Decision Have On The Currency?

On 19 – 20 March, the Federal Open Market Committee (FOMC) of the U.S. Federal Reserve will meet to decide on key interest rates in the U.S. economy. The Fed is expected to leave rates unchanged.

The Fed began raising the rate in March 2022. By May 2023, it increased from around 0% to 5–5.25%. In July, the Fed raised the rate by another 25 basis points (bps) to 5.25–5.5%, the highest since early 2001. In the following meetings, the Federal Reserve left the discount rate per annum unchanged.

Economic indicators suggest that U.S. inflation has been falling over the past year, reaching 3.2% by February 2024, mainly due to falling commodity and energy prices. However, the latest U.S. Consumer Price Index (CPI) and Producer Price Index (PPI) suggest that progress has stalled or even reversed. Thus, the CPI during the quarantine period increased by 3.2% compared to the same month last year and by 0.4% compared to the end of the month.

The PPI in February jumped by 0.6% relative to January—in annual terms, the index rose by 1.6%. The strong labour market in the U.S. also supports the argument in favour of tight monetary policy. For example, the number of Americans applying for unemployment benefits fell by 1,000 last week to 209,000 from the previous week’s revised figure of 210,000.

‘Fresh inflation and unemployment data are giving Fed officials more and more reasons to refrain from cutting interest rates, and it seems clear that we are in for a decision to keep the key rate unchanged’, said Kar Yong Ang, a financial market analyst at Octa.

The U.S. Dollar Index has failed to break the 102.6 support level downwards for the last four days. Now, the price is showing an exit from the narrow range and a bounce from the support level. If the price can close above the 103 mark, we should expect growth to the level of 103.50–103.75. We can talk about a downtrend if the price closes below 102.6.

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