Home > Commodities > Fed hikes rates by 25 basis points as scheduled, dollar falls by nearly 0.3%. What's next?

Fed hikes rates by 25 basis points as scheduled, dollar falls by nearly 0.3%. What's next?

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On July 26th,pi coin binance the Federal Reserve's FOMC announced a 25 basis point interest rate hike, raising the target range for the federal funds rate to 5.25% to 5.50%, in line with market expectations. Following the decision, the US dollar index fell to a daily low of 100.863 and breached the 101 level, experiencing a intraday decline of 0.5% and ultimately closing down 0.26%. Looking ahead, we believe that the overall trend of the depreciation of the US dollar remains unchanged, but the extent of the depreciation is limited.




1.Did Powell's speech lean more dovish or hawkish after the Federal Reserve raised interest rates by 25 basis points as scheduled?

On July 26, in Eastern Time, the Federal Reserve announced after the FOMC meeting that it would raise the target range for the federal funds rate to 5.25% to 5.50%, reaching the highest level in twenty-two years, with a 25 basis point increase, in line with market expectations.




The statement on this decision is relatively minor compared to June's changes. Regarding interest rate guidance, it states that the Fed will continue to assess new information and its impact on monetary policy.






【Source：MacroMicro】




During the press conference, Powell remained cautious and did not disclose any information indicating that interest rates have peaked. He reiterated his stance of "higher and longer" interest rates, warning that the market is overly optimistic.




Regarding the September meeting, Powell believes that a decision should be made after more data is available. If the data supports it, there may be another interest rate hike in September. There won't be any rate cuts this year, but several officials support multiple rate cuts next year.




In addition, the Federal Reserve no longer predicts a recession for the US economy and has improved its assessment of the US economy.




There are divergent interpretations of Powell's speech in the market, with some considering it hawkish and others considering it dovish. During the press conference, US stocks initially rallied, but later declined, and the Dow Jones ended up while the S&P and Nasdaq closed down.




Looking at the CME Group's FedWatch tool, there was little change in market expectations for the Fed's rate hike path, indicating that Powell's speech was largely within expectations. We believe this speech leaned towards neutrality.






【Source：CME】




Considering that the current core inflation is still a distance away from the Federal Reserve's 2% target, with the fading base effect and resilient economic aggregate demand, there is still a possibility of inflation picking up in the fourth quarter. We believe that the Federal Reserve may "skip" rate hikes in September but there is still a possibility of rate hikes in the fourth quarter.




2.The U.S. dollar index dropped by about 0.3%. What are the expectations for its future direction?

Before the Federal Reserve's decision was announced, the US Dollar Index (DXY) changed from an increase to a decline but remained above the 101 level. After the Federal Reserve's decision was announced, the US Dollar Index fell to a daily low of 100.863 and broke below the 101 level, experiencing a maximum intraday decline of 0.5%. Non-US currencies saw an increased gain, with the Euro rising above 1.11 against the US Dollar and the Yen rising above 140. Ultimately, the US Dollar Index closed down 0.26%.




Looking ahead, as the Federal Reserve nears the end of its rate hikes, the overall trend of US dollar depreciation remains unchanged. However, we believe that the extent of the US dollar's devaluation is limited for two reasons:




1) Compared to other countries, the US economy is more resilient.

2) Inflation in the US is easing, but inflation in other countries such as Europe is also declining, narrowing the divergence in monetary policy expectations.




Next, attention should be paid to policy announcements from the European Central Bank (ECB), among others. Tonight, the ECB will announce its interest rate decision, and if the statement leans dovish, the US dollar may experience a slight rebound.




Technical analysis

From a technical perspective, the US Dollar Index (DXY) has fallen below the 5-day moving average, breaking the rebound trend. If it fails to regain the key level of 101 in the short term, further decline is expected. The support level is seen at 100.2, while the resistance level is at 101.5.






【Source：TradingView】




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