US Dollar takes over as Greenback takes control in US session on Tuesday
|- US Dollar price action moves into choppy trading after headlines from Russia mixed with bullish equities.
- Traders will likely keep their powder dry for the main event on Friday, with US Fed Chair Powell's speech at Jackson Hole.
- The US Dollar Index could drop further as it breaks below important technical support.
The US Dollar (USD) erases nearly all losses from early Tuesday and even flips plenty crosses in favor of the Greenback. On Monday, the US Dollar seemed to remain steady and unphased with nervousness building towards Friday’s important speeches at the Jackson Hole Symposium. It now rather seems that traders remain absent or are again doubling down on the possibility of US Fed Chairman Jerome Powell announcing those long-awaited rate cuts.
Patience is a virtue though, certainly in financial markets and trading. Traders that remained disciplined on Monday and Tuesday can get some clarity on what to do next as two of Fed speakers are to hit the wires. Some additional economic data points are due as well, namely Redbook, US Existing Home Sales and the Richmond Fed Manufacturing Index. These data could confirm the current retreat in the US Dollar Index and signal future trends.
Daily digest: US Dollar all over the place
- A Russian headline claiming that Russia has destroyed a US-made military vessel near Snake Island, triggeres a sharp decline in EUR/USD with the Greenback erasing a 50 pip loss intraday and dropping nearly 50 pips, making it a one-figure move intraday. At the moment it does not look like the vessel was operating under a US flag.
- The US Redbook Index was released at 12:55 GMT. The Index advanced from 0.7% to 2.9%.
- Existing Home Sales data will come out at 14:00 GMT. Sales for July expected to slide marginally from 4.16M to 4.15M.
- The Richmond Fed Manufacturing Index for August will come in together with the Existing Home Sales data. The index is expected to stay negative, from -9 to -7.
- Michelle Bowman from the Fed will take the stage at around 18:30 GMT. Austan Goolsbee from the Federal Reserve bank of Chicago is set to speak around that same time. Any headlines might give an insight or prelude on what to expect from US Fed Chairman Jerome Powell on Friday.
- Meanwhile US Fed member Tom Barkin said that Credit card debt is now basically on the trend line from before the pandemic and that the US economic performance is impressive compared to monay other countries. He went on to say that if the US had a recession, it would not be a severe one and the Fed needs to achieve its 2% goal, to ensure it stays credible as a central bank.
- The BRICS convention starts its second day in South Africa with the organisation welcoming nearly 20 new members. the major theme will be the discussion on dedollarization and the setup of a payment system between the nations. India and South Africa already came out opposing the idea of disregarding the US Dollar.
- Brazilan president Luiz Inácio Lula da Silva said that Brazil will not reject the US Dollar, though will continue to use it while sometimes trading in the Brazilian currency.
- Equities are up across the board, with both Japan and China up over 1%. European markets are taking over the positive sentiment and are flirting as will with 1% gains. US equity futures are all in the green and the fear gauge VIX index is sliding lower.
- The CME Group FedWatch Tool shows that markets are pricing in an 85.5% 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 4.34% after touching a new yearly high on Monday in late US trading. The bond market will be very sensitive to any news on Friday at the Jackson Hole Symposium. The whole US yield curve could move up or down depending on the speech from Fed Chairman Jerome Powell.
US Dollar Index technical analysis: double peak risk
The US Dollar turns green as choopy trading is the mode in which traders need to operate this Tuesday, driven by several headlines coming from Ukraine, China and Europe. Meanwhile the earlier decline this morning and on Monday, in the wake of the main event of Friday points to a few traders doubling down on the possibility of a surprise dovish announcement from US Fed Chairman Powell. The moves are looking exaggerated as well as less volume is being traded with most traders sidelined until the main event Friday.
On the upside, 104.00 is the level to reach. The high of Friday at 103.68 is vital and needs to get a daily close above it 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 the 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 103.19, which already got broken this Tuesday morning. Passing below the 103.00 figure, some room opens up for a further drop. However, around 102.38 both the 55-day and the 100-day SMAs await 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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