US Dollar is the only deal in town
|- The US Dollar keeps pressing after upbeat ISM on Wednesday and strong job data on Thursday.
- Surprise rate cuts out of Poland make the ECB, BoE weaker against Fed.
- The US Dollar Index breaks above 105 but takes a small step back on Thursday.
The US Dollar (USD) is rolling through the markets as a clear rate divergence is unfolding, splitting the Atlantic Ocean into two with Western and Central Europe devaluing as local rates plummet, while the steady for longer is pushing US yields up fuels further the rally in the Greenback. Equites are taking another nosedive move with the S&P 500 breaking below the 55-day Simple Moving Average (SMA) and the volatility index (VIX) pushing higher. With the surprise 0.75% rate cut from the Polish Central Bank, analysts are further increasing the rate divergence trade where US rates will remain elevated for longer and Europe, the United Kingdom and Central European countries will have to cut quicker and more aggressively in order to avoid a crashing economy.
The macroeconomic data coming in this Thursday is further confirming the above statement with Nonfarm payrolls popping up 3.5%, from 3.7% previous where 3.4% was expected. Additional oil on the fire comes from the Initital Jobless Claims number that drops from 228k to 216k, where an uptick to 324k was expected. Markets will be on edge to hear from five different US Federal Reserve officials to hear what they have to say about the current market conditions.
Daily digest: US Dollar top of the bill
- US, South Korea and Japan have issued a joint statement, condemning the attempted space launch from North Korea.
- US and EU are working on a tariff deal on excess Chinese steel.
- As if the US is in a universe on its own. Another batch of data confirming strong economic health in the US where a soft landing grows as a possibility by the day. The Initial Jobless Claims numbers at 12:30 GMT were a drop from 228k to 216k. The Continuing Claims went from 1,725k to 1,679k. In both measures an uprising was expected. Add the steady Nonfarm Productivity for Q2 from 3.7% to 3.5%, beating the 3.4% estimate and it looks like the US is set to outpace Europe and other economies once again.
- A chunky batch of US Federal Reserve speakers: Patrick Harkers from Philadelphia is to kick off the headlines at 14:00 GMT. Next Fed member Austan Gooldsbee from Chicago will speak at 15:45 GMT. At 19:30 GMT, John Williams from New York will speak together with Raphael Bostic from Atlanta. Michelle Bowman will deliver the last remarks from Fed members this Thursday around 20:55 GMT.
- Equities in Asia are taking over the negative mood in which the US closed on Wednesday: The Hang Seng Index has fallen over 1% near its closing bell on Thursday. Meanwhile, European equities are firmly in the red but containing losses.
- The CME Group FedWatch Tool shows that markets are pricing in a 93% 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 4.29% and keeps heading higher after the US Treasury issued quite a lot of debt paper on Tuesday. The auctions flooded the markets with supply and saw yields ramping up.
US Dollar Index technical analysis: US Dollarindex eyeballs yearly high
Taking a step back to the recent turn of events, it becomes clear that this week has already been a seismic shift from this year’s monetary policy for several big central banks. The clear shift in stance can be witnessed with the US Federal Reserve and the Bank Of Canada sticking to the higher for longer timeline concerning interest rates, while Poland and the European Central Bank are seeing EU data signaling distress. This only adds to more fuel in the rate divergence between the two big geographical blocks. Expect to see more gains in the US Dollar Index (DXY) in the fall once the ECB and other Central-European countries start to cut, while the Fed keeps rates steady throughout 2023.
All eyes stay on 105.00 after the DXY briefly broke the level on Wednesday. Only a few cents to go and the DXY will be at a new six-month high. The next levels are at 105.88, the high of March 2023, which would make a new yearly high. If the index reaches this last level, some resistance might kick in.
On the downside, the 104.30 figure is vital to keep the US Dollar Index sustained at these elevated levels. Some room lower, the 200-day Simple Moving Average (SMA) at 103.06 comes into play, which could bring substantially more weakness once the DXY starts trading below it. The double belt of support at 102.42, with both the 100-day and the 55-day SMA, are the last lines of defence before the US Dollar sees substantial and longer-term depreciation.
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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