The USD Remains Soft After FED’s Barr, Bostic

The USD has retreated for a month as markets expect the FED to start cutting interest rates, despite FOMC members not giving any signals.

Skerdian Meta•Monday, May 20, 2024•2 min read

The USD has been retreating for more than a month as markets expect the FED to start cutting interest rates, despite FOMC members not giving any signals on such action any time soon. Today we have a number of FOMC members holding speeches, with Broadbent and Bostic already having their say, however the USD remains little phased.

USD Index DXY Chart Daily – The 200 SMA Held As Support

The USD Index DXY retreated lower in May, falling below 105 points, as risk sentiment has been mostly positive while the USD sentiment has been negative. However, moving averages have been acting as support on the daily chart, with the 50 SMA (yellow) holding the decline initially, while the 200 SMA (purple) took over after the dive last week following the soft US CPI inflation report. The price bounced off that moving average on Thursday, but the 50 SMA turned into resistance this time, rejecting the price on Friday.

UBS Expects FED Rate Cuts Sooner

According to analysts at UBS, recent figures from the US economy suggests a return to falling inflation, which could prompt the Federal Reserve to begin rate cuts sometime this year. They highlight that data in recent weeks has been slightly softer, contributing to their prediction. Specifically regarding inflation, UBS notes that price pressures in categories such as shelter have eased in recent months. This trend is expected to push the Consumer Price Index (CPI) down in the coming months, aligning with their outlook for disinflationary pressures.

Fed officials have indicated that a one-month improvement in inflation would not be sufficient to prompt a policy change. However, if inflationary trends persist over a three-month period or a quarter, there could be grounds for a reassessment. Based on this assumption, the earliest, there could potentially be a rate reduction at the June meeting, although the chances are pretty slim and this would require further decline inflationary developments.

Comments from FOMC Member Bostic

It is going to take a while before we are certain inflation is headed to 2%
Data on inflation has been very bumpy
My outlook is that inflation will continue to fall this year and into next year
But we’ve still got a ways to go
Fed is open to all possibilities on economic path
Risks are really balanced right now
Our policy stance is restrictive
Business leaders tell me that things are slowing down, but very gradually
It will take a while for that momentum to play through in the economy

Comments from FOMC Member Barr

Regulators exploring targeted adjustments to existing liquidity rules
Regulators considering requiring larger banks to hold minimum levels of reserves and pre-positioned collateral at discount window
Larger banks would be required to have available liquidity to cover uninsured deposits
Regulators considering restriction on how much banks can rely on ‘held-to-maturity’ securities under liquidity requirements
Regulators reviewing regulatory treatment of certain types of deposits, including those tied to venture capital or cryptocurrency businesses
Q1 inflation “disappointing,” did not provide the confidence needed to ease monetary policy
Fed will need to allow tight policy further time to continue to do its work
Fed in a good position to “hold steady” and watch economy
Vigilant to the risks to both inflation and employment mandates
Current approach “prudent” to manage both sets of risks

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Skerdian Meta

Lead Analyst

Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.