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The dollar index is gearing up to face an upcoming historic week

Today's market analysis on behalf of Rania Gule Market Analyst at XS.com

 

March 18, 2024 (Investorideas.com Newswire) The US dollar index is experiencing a phase of balance today, Monday, settling at 103.46 points midday, before disturbances intensify this week with at least five central banks preparing to release statements on future interest rate policies.

The first and most significant will be the Bank of Japan's decision on interest rates tomorrow, Tuesday, and the second will be the Federal Reserve's decision on interest rates on Wednesday. Both meetings will be crucial, as the Bank of Japan is expected to halt years of easing interest rate policies and try not to disrupt markets while Japanese stock markets have risen by over 2% ahead of the Tuesday meeting.

The Federal Reserve will provide evidence regarding interest rate expectations following recent high inflation figures that have stirred market concerns. After pricing in seven interest rate cuts earlier this year, markets now anticipate only two cuts by the end of the year, supporting the dollar's strength against other assets in the medium term.

At the end of this week, at least three Federal Reserve members, including Federal Reserve Chair Jerome Powell, will deliver speeches and data that could significantly influence markets if Wednesday's interest rate decision is not clear enough for markets. This event will be the most significant of the week from my perspective, especially after Vladimir Putin secured another term as Russia's president yesterday, Sunday.

Despite Putin's statement that peace talks with Ukraine will not proceed, China has expressed a desire to initiate peace talks, which will also ignite geopolitical tensions and support safe-haven assets, with the dollar being one of the most important.

Other central banks will also release interest rate decisions this week, such as the Reserve Bank of Australia (RBA) on Tuesday, the Swiss National Bank (SNB) on Thursday, along with the Bank of England (BoE). Therefore, we will witness very high fluctuations, especially on currency pairs linked to the dollar, such as the pound, franc, and euro, necessitating caution and refraining from entering long-term buying or selling positions without strong and deliberate risk management.

I also believe that the People's Bank of China (PBoC) surprised markets by fixing the US dollar against the Chinese yuan today, Monday, at 7.0943, while it was expected to reach 7.1993. This comes after markets anticipated that the PBoC might abandon its stronger fixing after last Friday's sudden exchange rate drop. Currency markets didn't react to the fixing.

At present, the expectations for the Federal Reserve to maintain interest rates temporarily at the March 20 meeting are at 99%, while the chances of interest rate cuts are at 1%. The yield on 10-year US Treasury bonds is around 4.30%, continuing its rise from last week.

Fundamentally, I believe that the US dollar index is trading in the green zone after markets were shaken on Thursday by a series of US economic data releases, indicating that inflation pressures have not yet subsided. This caused concerns in the markets, triggering a wave of risk asset selling such as stocks and Bitcoin, pushing yields up with bond selling and boosting the US dollar against all assets.

In my view, these were the effects of the sudden rise in Producer Price Index (PPI) numbers that concerned investors, who quickly repriced the first interest rate cut by the Federal Reserve away from June and towards September. Therefore, Thursday's data on Consumer Price Index manufacturing and services, unemployment rates, and the Philadelphia Index will be crucial in determining the data for Powell's speech next Friday and thus will move the markets violently and variably in the short term.

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