Dollar Index: Some bullish bias before FOMC

The FOMC meeting is the main event of the day on Wall Street and can set the market mood for weeks to come, as the Fed often leads global monetary policy cycles. 

No actual rate changes are expected today, and traders’ attention will be focused on the FOMC’s updated projections for interest rates, inflation, and the economy. Last time, in December, the Fed expected three rate cuts before the end of 2024. However, the market then priced in as many as five cuts. 

Higher-than-expected inflation in recent months has led to a reassessment of expectations. Interest rate futures are now pricing in a 64% probability of three or more rate cuts by the end of the year and a 90% probability of two or more. 

The shift in expectations from the current point is volatile for markets. Observers note that the economy is experiencing slower growth alongside higher inflation figures. This could prove to be a source of softening Powell’s rhetoric while supporting further index gains and dollar declines. 

Over the past six months, markets have only wanted to hear easing signals from the Fed and have ignored everything else. At the end of last year, it was absurd to see traders betting on five rate cuts in 2024. Now, the tide has turned, and there is a chance that the markets will also reach absurdity, but in a different direction. 

Along with the change in the direction of market expectations regarding the Fed’s projections, the dollar has also changed. The DXY has gained strength since last Thursday, but it is where it was in early March, early February, and early December. 

The medium-term technical picture for the DXY is slightly bullish. Since the start of the day on Wednesday, the dollar has moved above its 200-day and 50-day moving averages. At the same time, the fast average will cross the slow average in a day or two, forming a “golden cross”. 

The intersection of these two moving averages is traditionally a strong signal, but this has had a poor recent track record for this instrument. Last September’s “golden cross” occurred when more than 2/3 of the rally was behind us, and the inverse cross – the death cross – was followed by a rise, not a fall as the signal suggested. 

In our view, a strong upside momentum from Wednesday’s results could be the starting point for a medium-term uptrend in the dollar. A sharp decline today will be a reason to pause for the next few days, and only a sustained decline will signal the establishment of a bearish trend in the DXY. 

The FxPro Analyst Team