Market Analysis on behalf of Rania Gule Market Analyst at XS.com
22 February 2024: The dollar index (DXY) rose during early Wednesday trading, currently at 104.15 points, recovering from yesterday’s losses driven by bond yield declines. Investors and traders eagerly await the release of the Federal Open Market Committee’s meeting minutes later today, seeking new signals on future monetary policy.
In my view, the U.S. dollar still faces some selling pressure on Wednesday, approaching its recent low of 104.00 points in an attempt to establish a new directional momentum amid cautious market sentiments in the near term.
Any new signals regarding the path of interest rate cuts by the Federal Reserve will play a key role in determining price trends. The markets have already priced in increasing expectations that the U.S. central bank will begin easing its monetary policy by mid-2024, with expectations of four interest rate cuts by 25 basis points by the end of this year, undermining the current strength of the dollar.
All of this occurs against signs that the U.S. economy is in good shape and hawkish comments from Federal Reserve members, continuing to support high yields on U.S. Treasury bonds, which weigh on stock markets. This may support the dollar as a safe-haven asset and help weaken any new downward movements.
I also believe that the market’s initial reaction to the People’s Bank of China’s decision yesterday to cut the loan interest rate for five years by 25 basis points, the largest cut since 2019, was short-term amid ongoing geopolitical tensions, especially in the Middle East.
Additionally, a White House official stated that the United States would announce significant sanctions against Russia next Friday to hold President Vladimir Putin accountable for the ongoing war in Ukraine. All these tensions support the dollar as a safe-haven asset.
However, I expect the Federal Open Market Committee meeting minutes to provide more clues about the Fed’s actions in the coming months. Market expectations of the central bank leaving interest rates unchanged in the upcoming policy meetings are rising, and expectations for an early start to interest rate cuts are fading, making this meeting the most crucial and impactful in price movements.
This is especially significant after the recent inflation report showed a new increase in consumer prices, making the Federal Reserve’s response crucial in determining future market trends. The firm stance of U.S. policymakers, indicating that interest rates will remain unchanged with no clear signals about the timing of policy easing, will strongly support the dollar. In contrast, prices may face increasing selling pressure if the Fed views the recent inflation spike as a temporary phenomenon and continues with plans to reduce interest rates shortly.
