US Dollar steady for 4th of July with markets not sprinting away
|- The US Dollar eases further after relatively dovish Fed Minutes.
- The focus will be across the Atlantic, with the UK heading to the voting booth.
- The US Dollar index bounces off 105.00, though selling pressure builds.
The US Dollar (USD) and US markets are closed due to Independence Day, though the break is more than welcome with very poor US economic data performance, which triggered some Dollar devaluation in its turn. Despite the public holiday, there is much to digest with several outside events occur on Thursday. The main event that will be building up towards the weekend will be the United Kingdom’s election outcome, where an end to the reign of the Tories party is forecasted after 14 years of being in power.
On the US economic front, an empty calendar ahead, though, as mentioned above, outside data and headlines will drive the Greenback. German Factory Orders already came in at the lowest end of expectations, shrinking -1.6% in May. In addition, the rather disappointing data from Wednesday will still weigh on the US Dollar, with limited upside potential expected for the Greenback.
Daily digest market movers: UK results not before night time
- UK citizens are heading to the voting booth. Early results are not expected until late evening and overnight. However, exit polls and comments from key politicians could generate headling in due time. Keeping an eye on the Cable (GBP/USD) will be key for the remainder of the week.
- The New York Times proclaimed that US President Joe Biden is considering withdrawing from the Presidential race.
- The US Federal Reserve Minutes showed the same message as markets heard over the past few weeks: more data is needed to confirm inflation is coming down. However, the Federal Open Market Committee (FOMC) is divided on how long rates need to stay elevated.
- European equities are marginally in the green, along with Asia, where Japan is leading the surge. US futures are flat and are facing less trading volume than usual due to the public holiday.
- The CME Fedwatch Tool is broadly backing a rate cut in September despite recent comments from Fed officials. The odds now stand at 67.3% for a 25-basis-point cut. A rate pause stands at a 26.5% chance, while a 50-basis-point rate cut has a slim 6.2% possibility.
- The US 10-year benchmark rate trades at 4.36%, near its weekly low. Note that the US bond market is closed due to the public holiday.
US Dollar Index Technical Analysis: NFP in line with the rest of this week's performance?
The US Dollar Index (DXY) eased quite substantially on Wednesday after a wave of softer US data made the DXY fell to 105.00. Luckily, Dollar bulls came in quickly to salvage the situation and push it back above the 55-day Simple Moving Average (SMA) at 105.32. Though, selling pressure is building on that support with another test early Thursday. Pressure could build in the runup towards Friday, when the Nonfarm Payrolls could be the catalyst that pushes the DXY all the way back to 104.75, which is the next key support.
On the upside, 105.53 and 105.89 are the first nearby pivotal levels. Once a daily close above those levels, the red descending trend line in the chart around 106.23 and the April’s peak at 106.52 are the two main resistances ahead of a fresh nine-month high. That would be reached once 107.35 is broken to the upside.
On the downside, the 55-day SMA at 105.22 safeguard the 105.00 round figure. A touch lower, near 104.76 and 104.44, both the 100-day and the 200-day SMA form a double layer of protection to support any declines together with the green ascending trendline from last December.
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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