FOMC: Restrictive Policy for Some Time

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USDIndex on Wednesday [11/10] fell -0.04% and recorded a 2-week low, while declining bond yields on Wednesday weakened the dollar as the yield on 10-year T-notes also fell to a 2-week low. In addition, the strength of stocks limited liquidity demand for the dollar. The dollar’s decline was limited after the US PPI in September rose more than expected, which is a hawkish factor for Fed policy.

The minutes of the FOMC meeting on 19-20 September were slightly hawkish and bullish for the Dollar.

US PPI for final demand rose 0.5% on a monthly basis in September, above expectations of 0.4%. Food, energy and trade services PPI increased 0.2% m/m, the 4th consecutive increase. Goods PPI rose 0.9% m/m while services PPI rose 0.3% m/m. For the 12-month period, PPI rose 2.2% y/y, above expectations of 1.6% y/y. It was the largest annual increase since 2.3% y/y in April. PPI for food, energy and trade services rose 2.8% y/y.

The minutes of the 19-20 September FOMC meeting stated that participants generally judged that with restrictive monetary policy, the risks to achieving the committee’s objectives became more two-sided. The minutes also noted that a majority of Fed officials saw one more rate hike as likely to be appropriate, while some said no further hikes were needed.

Fed comments on Wednesday were mixed against the Dollar. On the downside, Fed Governor Waller said the Fed is finally getting inflation under control and is in a position to watch and look at interest rates. In addition, San Francisco Fed President Daly said tighter financial conditions could mean the Fed doesn’t need to do much to interest rates. Meanwhile, Fed Governor Bowman said, despite recent improvements, inflation is still well above the FOMC target of 2%. Domestic spending continues at a high pace and the labour market remains tight. This suggests that the policy rate may need to be adjusted and remain restrictive for some time to return inflation to its objective.

Overall, the Fed is in a position to proceed with caution, and a cautious approach is necessary as there is still high uncertainty, especially due to the volatility of economic data and potential data revisions, which was also indicated in the meeting minutes.

USDINDEX,D1

On Wednesday the USDIndex was still correcting after five consecutive days of declines, but the range narrowed as traders awaited the release of the minutes of the last FOMC policy meeting for further clues on the central bank’s interest rate outlook for the coming months. But after the FOMC meeting, the Index also did not move far from the early day opening.

The pullback from 107.02 was temporarily stalled at the 23.6 FR% level [from 99.19-107.22 pullback] which kept the downside limited for 2 consecutive days. Oversold conditions on the daily chart are contributing to a possible consolidation scenario before a fresh push lower, as dollar sentiment is split by Fed policymakers’ comments.

The Dollar is likely to come under renewed pressure, if the sentiment deteriorates and changes to dovish in the future, with a drop to test the price levels below 105.00. However, a bounce above the 106.00 barrier would strengthen the short-term structure. The price average moved above the 52-day EMA and held at the 26-day EMA. The oversold level on the RSI and the MACD signal crossover temporarily validate this week’s price action. Of note, recent US economic data has been positive and suggests the strength of the economy could support the Dollar to hold for longer.

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Ady Phangestu

Market Analyst – HF Educational Office – Indonesia

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