Forex Today: Eyes on last Fed policy announcements of 2023

The November inflation report from the US failed to help major currencies find direction on Tuesday, with market participants refraining from taking large positions ahead of the Federal Reserve’s (Fed) last policy announcements of the year. The Producer Price Index (PPI) data will also be featured in the US economic docket and the Fed will publish the revised Summary of Economic Projections (SEP), also known as the dot plot, alongside the policy statement. Finally, Fed Chairman Jerome Powell will hold a press conference to speak on the policy outlook and to respond to questions.

The Consumer Price Index (CPI) in the US rose 3.1% on a yearly basis in November as expected. The Core CPI inflation, which excludes volatile food and energy prices, held steady at 4% in the same period, matching the market consensus. After fluctuating wildly with the immediate reaction to CPI readings, the US Dollar Index (USD) stabilized below 104.00. Meanwhile, the benchmark 10-year US Treasury bond yield retreated to the 4.2% area and Wall Street’s main indexes closed in positive territory. Early Wednesday, the 10-year yield continues to fluctuate at around 4.2% and the USD Index moves sideways near 104.00. The Fed is widely expected to leave the policy rate unchanged at 5.25%-5.5%. Investors will pay close attention to the dot plot to try to figure out the timing of the policy shift next year. 

US Dollar price this week

The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the strongest against the Japanese Yen.

USD -0.17%0.19%0.11%0.51%0.66%0.53%-0.39%
EUR0.17% 0.36%0.28%0.68%0.81%0.69%-0.22%
GBP-0.18%-0.36% -0.08%0.33%0.47%0.34%-0.59%
CAD-0.11%-0.28%0.08% 0.39%0.57%0.43%-0.51%
AUD-0.52%-0.69%-0.33%-0.41% 0.15%0.02%-0.92%
JPY-0.66%-0.82%-0.55%-0.55%-0.15% -0.14%-1.04%
NZD-0.53%-0.70%-0.34%-0.42%-0.01%0.14% -0.92%
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

In the early Asian session on Thursday, the Australian Bureau of Statistics will release employment data for November and the University of Melbourne  will publish Consumer Inflation Expectations for December. After rising above 0.6600 on Tuesday, AUD/USD erased its daily gains to close flat. Early Wednesday, the pair trades modestly lower on the day at around 0.6550.

EUR/USD spiked to a weekly high above 1.0820 with the immediate reaction to US inflation data on Tuesday but failed to preserve its bullish momentum. In the European morning, the pair seems to have gone into a consolidation phase slightly below 1.0800. Eurostat will release Industrial Production data for October on Wednesday.

Following a quiet Asian session, GBP/USD came under renewed bearish pressure and was last seen trading in negative territory below 1.2550. The UK’s Office for National Statistics reported on Wednesday that the Gross Domestic Product (GDP) contracted by 0.3% on a monthly basis in October. Industrial Production and Manufacturing Production declined by 0.8% and 1.1%, respectively, in the same period.

Tankan Large Manufacturing Index improved to 12 in the fourth quarter from 9, the data from Japan showed early Friday. On a negative note. Tankan Large Manufacturing Outlook declined to 8 from 10. USD/JPY continued to stretch higher during the Asian trading hours and came within a touching distance of 146.00 by the European morning.

Gold closed the second day of the week little changed but failed to attract buyers early Wednesday. As of writing, XAU/USD was trading at its weakest level in three weeks below $1,980.


What does the Federal Reserve do, how does it impact the US Dollar?

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.

How often does the Fed hold monetary policy meetings?

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.

What is Quantitative Easing (QE) and how does it impact USD?

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.

What is Quantitative Tightening (QT) and how does it impact 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.

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