Monday, May 27, 2024

After the Fed’s Decision… What’s Next for the Dollar?


  • Market focus has recently shifted from geopolitical issues to economic data
  • The US dollar fell slightly following the Federal Reserve’s decision to keep rates unchanged
  • At the same time, the EUR/USD pair continued to recover against the dollar

In recent days, financial markets have seen a shift in focus, moving from geopolitical concerns to economic data, as news flow in the Middle East slows..

Geopolitical tensions continue to pose major risks to the global economy. Rising energy costs, especially in countries experiencing high inflation rates, complicate the effectiveness of monetary policies used by central banks. In this context, the decision taken during the recent US Federal Reserve Federal Open Market Committee meeting is critical for the US economic trajectory..

While the Fed chose this month to move interest rates to a range of 5.25% to 5.50%, in line with expectations, there is a growing sense in the market that the final rate hike has been reached, marking the start of next month. Duration of interest rate changes. Also, the FOMC report acknowledged rapid economic growth and continued high inflation last quarter. Notably, it highlighted cost pressures from rising interest rates, which could affect employment and inflation.

In this context, the central bank reaffirmed its commitment to effective use of monetary policy instruments to address increasing risks of deviation from the inflation target. Chairman Powell emphasized that future decisions will depend on economic data and made it clear that interest rate cuts are not currently on his agenda..

In this context, tomorrow’s nonfarm payrolls report and October’s inflation data release will serve as key indicators to gauge whether the central bank will go ahead with a rate hike in December..

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The US dollar fell slightly after the Fed’s decision

Meanwhile, the US dollar maintained a sideways path, seeing a slight decline amid the perception that interest rates have peaked. Stability has provided some relief to risky currencies and equities. It should be noted that the currency remains an important measure of risky assets, maintaining a positive outlook and recently approaching the $36,000 level..

As a result, discussions of the central bank’s speech have shifted from discussions about how long interest rates will stay high to a more balanced and bleak stance for now..

Technically, a closer look at the dollar index reveals its ongoing struggle around the 106.6 level. The dollar index is showing relative weakness, approaching the 107 range, after switching from a bullish trend to a flat pattern in October. The nearest support is currently in the lower zone at 106.2..

DXY Daily Chart

On the daily chart of the dollar index, we can see that the 105.5 level corresponds to the lower boundary of the channel formed last month. Although the Fed’s less hawkish tone from yesterday contributed to the dollar’s weakness, it is clear that the 106.2 support level is currently being tested. If this level is breached, the focus may be on the second support level at 105.5, and a possible breach will lead to a further decline in the value of the dollar, which may extend the index correction to the range of 102-103..

On the other hand, the May-July correction indicates that the cycle may have completed within the Fibonacci extension zone, given the peak reached in October and the failure to cross the 107 level. Technically, the next phase may involve a quick correction below the 105 level.

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However, as long as the dollar index remains above 105, it is likely to retain its status as a safe-haven asset. If mounting pressures from geopolitical risks push investors towards the dollar, a short-term rally towards 108.5 with support at 105 could be seen..

In short, the future path of the dollar index appears to depend on a clear daily close above the 105 and 107 ranges, which forms its next direction..

Technical analysis of a pair : The euro is trying to recover against the dollar

The EUR/USD pair is trying to recover from the 1.04 levels in early October while moving horizontally. The euro began to show signs of pausing its downward momentum last month after falling as much as 7% against the dollar from its peak in the July-October period..

The EUR/USD pair continues to test the resistance level at 1.0636. A daily close of the pair above this price level could see the next move towards the 1.075 level. This point may be important for the trend reversal of the EUR/USD pair.

According to recent conditions, the pair may continue on its way until it stays within the channel created during the recovery effort that began in October..

If the lower limit of the channel is breached, the pair may retest the 1.045 area on daily closes below the 1.056 level, depending on the strength of the dollar..


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Find all the information you need at InvestingPro!

Discharge Liability: This article is written for informational purposes only; It does not constitute a solicitation, offer, investment advice or recommendation and is in no way intended to induce the purchase of assets. I would like to remind you that any type of property is evaluated from multiple perspectives and involves high risks, so any investment decision and associated risks are the responsibility of the investor..

Nadia Barnett
Nadia Barnett
"Award-winning beer geek. Extreme coffeeaholic. Introvert. Avid travel specialist. Hipster-friendly communicator."

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