US Dollar steady ahead of BoJ and RBA overnight event risk

  • The US Dollar moves in a narrow range on Monday. 
  • Traders brace for a historic week ahead with no less than five major central banks communicating on their monetary policy.
  • The US Dollar Index trades around the mid 103.00s and is expected to remain steady. 

The US Dollar (USD) trades at a very calm point ahead of a big surge in volatility this week with no less than five central banks set to issue rate policy statements. The first most important one will be the Bank of Japan (BoJ) rate decision on Tuesday and the second one the US Federal Reserve rate decision on Wednesday. Both meetings will be crucial: The BoJ is set to leave decades of negative interest rate policy while trying not to disrupt markets, and the Fed will give clues over the interest-rate outlook after the recently hot inflation numbers made markets nervous.  

Monday’s US economic calendar is light. For more pivotal data points, look at Thursday with the preliminary Purchasing Managers Index (PMI) data for March. Right at the end of the week no less than three Fed members, Fed Chairman Jerome Powell included, will deliver speeches and statements that could further guide markets in case the rate decision on Wednesday was not clear enough for markets. 

Daily digest market movers: Risk ahead on Tuesday morning

  • Vladimir Putin has secured another term as Russian President on Sunday. Despite comments from Putin that peace talks with Ukraine will not take place, China has said it wants to start peace talks. 
  • The BoJ is expected to steer its policy rate away from negative rates for the first time in decades. Markets seem to be broadly anticipating the move, with  Japanese equity markets rallying over 2% ahead of the meeting overnight on Tuesday. 
  • Other central banks this week are the Reserve Bank of Australia (RBA) on Tuesdsay, the Swiss National Bank (SNB) on Thursday together with the Bank of England (BoE). 
  • The People’s Bank of China (PBoC) made a surprise stronger USD/CNY fixing on Monday at 7.0943 while 7.1993 was expected. This comes after analysts thought the PBoC was letting loose on its stronger fixing after a surprise weaker exchange rate on Friday. Currency markets are not really reacting to the fixing. 
  • Monday’s US data calendar kicked off at 14:00 GMT with the NAHB Housing Market Index for March. February was in contraction at 48, where March is seeing a pickup again to 51.
  • The US Treasury Department will allot a 3-month and a 6-month bill at 15:30 GMT.
  • Equities are opening the week in the green across the board. Special notice for the Japanese Nikkei and Topix, both up over 2% for this Monday. The Nasdaq and S&P500 are following suit by trading near 1% higher. 
  • According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the March 20 meeting are at 99%, while chances of a rate cut stand at 1%. 
  • The benchmark 10-year US Treasury Note trades around 4.32%, continuing its ascent from last week.

US Dollar Index Technical Analysis: Dot Plots and central banks 

The US Dollar Index (DXY) is facing two main events this week which could see a surge in volatility for the Greenback, though with the risk of standing still at the end of the rollercoaster ride. Although the BoJ is set to deliver a game-changing rate decision and the Fed will need to be more clear to ease the nervousness in the market, it could actually not move the needle that much on the charts. 

The BoJ rate change has been overly communicated and commented on since December last year, while markets have grown accustomed to the constant repricing of when that initial rate cut from the Fed could take place.

On the upside, the 55-day Simple Moving Average (SMA) at 103.46 is facing some pressure again, likewise with Friday. Not far above, there is a double barrier with the 100-day Simple Moving Average (SMA) near 103.63 and the 200-day SMA near 103.70. Depending on the catalyst that pushes the DXY upwards, 104.96 remains the key level on the topside. 

Should both central bank meetings turn into a non-event, expect to see some easing in the US Dollar.  In this scenario, the downside looks inevitable once markets move forward again to price in a Fed rate cut for June, with 103.00 and 102.00 up next. Once through there, the road is open for another leg lower to 100.61, the low of 2023.

Dot Plot FAQs

The “Dot Plot” is the popular name of the interest-rate projections by the Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed), which implements monetary policy. These are published in the Summary of Economic Projections, a report in which FOMC members also release their individual projections on economic growth, the unemployment rate and inflation for the current year and the next few ones. The document consists of a chart plotting interest-rate projections, with each FOMC member’s forecast represented by a dot. The Fed also adds a table summarizing the range of forecasts and the median for each indicator. This makes it easier for market participants to see how policymakers expect the US economy to perform in the near, medium and long term.

The US Federal Reserve publishes the “Dot Plot” once every other meeting, or in four of the eight yearly scheduled meetings. The Summary of Economic Projections report is published along with the monetary policy decision.

The “Dot Plot” gives a comprehensive insight into the expectations from Federal Reserve (Fed) policymakers. As projections reflect each official’s projection for interest rates at the end of each year, it is considered a key forward-looking indicator. By looking at the “Dot Plot” and comparing the data to current interest-rate levels, market participants can see where policymakers expect rates to head to and the overall direction of monetary policy. As projections are released quarterly, the “Dot Plot” is widely used as a guide to figure out the terminal rate and the possible timing of a policy pivot.

The most market-moving data in the “Dot Plot” is the projection of the federal funds rate. Any change compared with previous projections is likely to influence the US Dollar (USD) valuation. Generally, if the “Dot Plot” shows that policymakers expect higher interest rates in the near term, this tends to be bullish for USD. Likewise, if projections point to lower rates ahead, the USD is likely to weaken.

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