US Dollar Price Forecast: USD gains on quiet Wednesday
|- Despite market concerns, the US economy continues to grow above trend.
- The market anticipates 100 bps of Fed easing by year's end.
- Wednesday won’t have any economic highlights, market sentiment to dictate the pace.
The US Dollar, measured by the DXY index, remained well-supported during Wednesday's session, driven primarily by selling pressure on the Japanese Yen following a cautious outlook by the Bank of Japan. The USD/JPY pair saw a significant 2% surge throughout the day, contributing to the DXY index's hold above the 103.00 point. While there won’t be any economic data highlights on Wednesday, caution and risk perception might dictate the pace of the USD.
While markets contended with potential implications of further easing from the Fed, the US economy continues to perform solidly. Growth remains above trend, suggesting a market caught up in overly aggressive easing forecasts.
Daily digest market movers: US economic performance calls into question market's aggressive easing bets
- The market remains mispriced on the extent of the Fed's easing, still fully pricing in 100 bps by year-end, a decrease from Monday's 125 bps expectations.
- The market now anticipates a near 80% likelihood of a 50 bps reduction in September, down from Monday's 90%
- Overall easing over the next 12 months is now expected between 175 to 200 bps, a reduction from the over 200 bps predicted on Monday
On the other hand, a severe US economic recession would need to materialize for the current easing path to remain feasible. Until more data is available, it remains challenging to counteract the prevailing dovish market narrative.
DXY technical outlook: Indications of improvement seen, bears take a breather
The DXY index's technical outlook is improving. Both the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are currently in the red, with the RSI below the 50-point level but pointing upwards, and the MACD continuing to print lower red bars.
However, a firmly bearish outlook is confirmed by the index remaining below the 20, 100 and 200-day Simple Moving Averages (SMAs).
With this in mind, current support stands at 103.00, 102.50 and 102.20 with resistance noted at 103.50 and 104.00.
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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