US Dollar on the back foot after surprise tariffs
|- US Dollar price action is mixed this Thursday after a firm three-day rally.
- Markets were caught by surprise from a hawkish FOMC minutes publication.
- The US Dollar Index consolidates near the monthly high.
The US Dollar (USD) is shooting itself in the foot as the US imposed tariffs on Tin Mil Steel coming from China, Germany and Canada in a surprise move on Thursday. The Greenback takes a firm step back after earlier markets added strength to the Greenback on Wednesday after the publication of the US Federal Reserve (Fed) Minutes from its latest interest-rate increase. Markets were caught by surprise as the minutes showed plenty of members in the FOMC are still seeing upside risks for inflation and consider that more needs to be done (more hikes or rates steady for longer) in order to keep inflation under control.
A few second-tier data points on Thursday could possibly let off some steam from this US Dollar rally. The weekly Jobless Claims could be a game changer as an uptick in unemployment could twist the arm of the Fed and might rather need some easing of the current monetary policy. The Philadelphia Fed Manufacturing Survey is due as well and could confirm current sentiment.
Daily digest: US Dollar eases this Thursday
- The US announces suprise tariffs on Tin Mill Steel which includes as well Canada, Germany and China. This could trigger another tit-for-tat trade war as seen under the presidency of former president Donald Trump.
- Main headlines this morning are about the US Federal Reserve Minutes from its latest rate decision. The committee sees risk of inflation picking up again and more monetary tightening is needed, a stance that surprised markets.
- Jobless claims were publisheded at 12:30 GMT: Initial claims declined from 248K to 239K, while continuing claims jumped from 1.684M to 1.716M.
- The Philadelphia Fed Manufacturing Survey for August was due as well at 12:30 GMT. Against expecations, it jumped into positive territory from -13.5 to 12.0.
- The US Treasury will tap the market for a 4-week bill auction.
- Another red day again this Thursday in equity markets. Investors are starting to realise that several major central banks are not done hiking interest rates, which means more bearish pressure on equities and growth. Still, losses seem to be contained and markets could still flip to the green.
- The CME Group FedWatch Tool shows that markets are pricing in an 86.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September.
- The benchmark 10-year US Treasury bond yield trades at 4.28%, jumping significantly on the back of the Fed Minutes. The whole yield curve got plotted higher on the back of the statement.
US Dollar Index technical analysis: hanging lower
The US Dollar is taking a small pause at the monthly high in the US Dollar Index (DXY). The Greenback itself is printing overall monthly highs in most major crosses, and even a 6-month high against a few. The Commonwealth and Scandinavian currencies are the biggest losers these past few days.
On the upside, 104.00 is the topside level to head to. The high of July at 103.57 is vital and needs to get a daily close above in order for the DXY to eke out more monthly gains. Should this US Dollar strength persist for the last part of this year, May’s peak at 104.70 could become reality again.
On the downside, several floors are likely to prevent a steep decline in the DXY. The first one is the 200-day Simple Moving Average (SMA) at 103.26. Passing below the 103.00 big figure, some room opens up for a turbulent drop lower. However, around 102.34 both the 55-day and the 100-day SMA are awaiting to catch any falling knives.
Central banks FAQs
What does a central bank do?
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%.
What does a central bank do when inflation undershoots or overshoots its projected target?
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.
Who decides on monetary policy and interest rates?
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%.
Is there a president or head of a central bank?
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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