US Dollar Index (DXY):  Rebounds as Fed keeps rates unchanged, foresees peak rates at around 5.6%

• Fed holds rates amid solid labor market and high inflation.
• Fed’s dot-plot predicts Federal Funds Rate at 5.6% by year-end.
• Fed anticipates 1% growth in 2023, with a high Core PCE at 3.9%.

The US Dollar Index (DXY), a gauge that tracks the American Dollar (USD) value against a basket of its rivals, trims some of its earlier losses, regaining the 103.000 mark, as investors brace for the Federal Reserve Chair Jerome Powell press conference. The greenback recovered even though the Fed held rates unchanged but revised its forecasts regarding the Federal Funds Rate (FFR) upward.

Summary of the Federal Reserve’s monetary policy statement

The Federal Reserve, in its recent monetary policy statement, highlighted the strength of the labor market, characterizing it as robust. The unemployment rate remains low, although inflation continues to be significantly high. The Fed warned that such tight market conditions could negatively affect economic activity.

Given those facts, Federal Reserve policymakers opted to maintain the current interest rates at the  5.00%-5.25% range. They believe this will provide them with the opportunity to assess further data and its implications for monetary policy. Policymakers emphasized the need to ensure inflation is steered back to the 2% mark over time, and to achieve this; they will consider the comprehensive effects of the monetary policy’s tightening, the delays inherent in how these policies impact economic activity and inflation, as well as the state of the economy and financial markets.

The Summary of Economic Projections (SEP), released alongside the statement, revealed a revised dot-plot where most officials now anticipate the Federal Funds Rate (FFR) to reach 5.6%

Officials from the Federal Reserve have adjusted their forecast for growth in 2023, now predicting it to be 1%, a notable increase from their March prediction of 0.4%. They also reviewed the unemployment rate, lowering it from 4.5% to 4.1%. As for inflation, the Core PCE, the Fed’s favored measurement, is now predicted to hit 3.9%, up from the 3.6% estimated in March. However, the overall PCE has been slightly revised to 3.2% from 3.3%.

US Dollar Index (DXY) reaction to the Fed’s decision

The DXY reacted from around the 102.600 area and jumped straight toward the 103.268 area, shy of cracking the 50-EMA at the 1-hour chart at 103.222, and fell short of erasing its earlier losses. Nevertheless, oscillators turned upwards, with the Relative Strength Index (RSI) about to cross the 50-midline, which would suggest further upside expected, putting into play the daily pivot at 103.326 and the 100-EMA at 103.392. Conversely, the DXY could extend its losses past the S1 pivot at 103.027, followed by the S2 daily pivot at 102.749, before breaking to new weekly lows.