US Dollar sees Trump effect play out with Greenback pushing higher
|- The US Dollar is on the brink of printing a fresh two-month high.
- Not only betting sites, but also financial markets are doubling down on a Trump win.
- The US Dollar Index has broken above a key resistance and is on its way to 104.00.
The US Dollar (USD) extends gains on Wednesday after breaking above a very heavy resistance level in the US Dollar Index (DXY). The Greenback received an extra push after former President Donald Trump appeared on Bloomberg television outlining his plans if he wins the November 5 presidential election. Trump delivered some harsh statements on trade, taxes and the Federal Reserve (Fed) which were enough to push the Greenback higher against most major currency peers as traders increasingly seem to price in a victory for the Republican nominee.
The US economic calendar is light on Wednesday, with no real market-moving data ahead and no Fed officials set to speak. Expect traders to sit on their hands in the run-up to the European Central Bank (ECB) meeting on Thursday.
Daily digest market movers: Trump in the lead
- During the US session on Tuesday, former President Donald Trump appeared in an interview on Bloomberg. He used the forum to further outline his plans on trade, the US economy and the Fed. His words pushed the US Dollar higher to fresh two-month highs against the Euro (EUR) and against the Chinese Yuan (CNY).
- Looking at the calendar, the weekly Mortgage Applications from the Mortgage Bankers Association (MBA) were due at 11:00 GMT. Applications fell by a staggering 17% after last week applications already fell by 5.1%.
- At 12:30 GMT, the Import/Export Price Index for September were reeleased:
- Monthly Export Prices fell to -0.7%, coming from a revised -0.9% (previous reading -0.7%) while the Monthly Import Price Index declined further by -0.4, coming from a negative 0.2% (previous -0.3%) in August.
- Equities are very binary this Wednesday with rather chunky losses for Europe, while US futures look quite positive after the US Opening Bell.
- The CME Fed rate expectation for the meeting on November 7 shows a 94.2% probability of a 25 basis point rate cut, while the remaining 5.8% is pricing in no rate cut. Chances for a 50 bps rate cut have been fully priced out.
- The US 10-year benchmark rate is trading at 4.00%, a touch softer than the high from last week at 4.11% seen on Thursday.
US Dollar Index Technical Analysis: DXY set to pop in case Trump wins
The US Dollar Index (DXY) is seeing ample amount of support and inflow for a second day in a row after former US President Donald Trump’s interview..
Markets are starting to take positions on the assumption that Trump will win the election, which traders seem to be associating to a stronger US Dollar based on his laid-out plans. With the DXY making its way through that difficult 100-day Simple Moving Average (SMA) at 103.21, the next level up is 103.78 and 104.00.
A double belt of resistance is ahead at 103.78, which aligns with the 200-day SMA. After that, there is a small gap before hitting the pivotal level at 103.99 and the 104.00 big figure. Should Trump start to further lead in the polls, a rapid swing up to 105.00 with 105.53 as first port of call could be on the cards.
On the downside, the 100-day SMA at 103.21 together with the pivotal level at 103.18 is now acting as support and should avoid the DXY from falling lower. With the Relative Strength Index near overbought territory, a test on this level looks granted. Further down, the 55-day SMA at 101.85 and the pivotal level at 101.90 should avoid any further downside moves.
US Dollar Index: Daily Chart
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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