US Dollar regains ground, Fed looms
|- Fed easing expectations continue to mount, and markets are pricing in high odds of 50 bps cut.
- Analysts expect 25 bps cut on Wednesday.
- US Retail Sales data has little impact on the USD.
The US Dollar remained stable at the start of the US trading session on Tuesday, showing little response to the release of Retail Sales data as anticipated. The US Dollar Index (DXY), which is a measure of the Greenback against a basket of six currencies, edged slightly higher, pulling away from its low for the year but with only a minimal recovery. Federal Reserve (Fed) easing has become more likely, with market pricing implying a 50 bps cut, while most analysts still predict a 25 bps cut.
The US economy is experiencing growth above historical norms, indicating that the market is pricing in overly optimistic expectations of monetary policy easing. This surge in optimism may be excessive as the economic data suggests that the Fed is likely to maintain its current stance of gradual interest rate increases.
Daily digest market movers: US Dollar rises mildly, investors still anticipate aggressive Fed easing
- Market expectations for aggressive Fed easing have increased ahead of Wednesday's FOMC decision.
- Most analysts anticipate a 25-basis-point cut, but a handful predict a larger 50-basis-point cut.
- The market is pricing in a 65% chance of a 50 bps cut and 250 bps of easing over the next 12 months.
- The market's aggressive rate path expectations are unlikely to be validated by the updated Dot Plot.
- Risks of a dovish surprise from the Fed remain, but not all members are expected to support such a move.
- On the data front, according to the US Census Bureau's report on Tuesday, Retail Sales in the US grew by 0.1% in August, reaching $710.8 billion.
- This followed a 1.1% rise in July and surpassed market predictions, which had anticipated a 0.2% decline. However, excluding automobile sales, Retail Sales increased by 0.1%, falling short of the expected 0.2% growth.
DXY technical outlook: DXY indicators signal bearish momentum but find support
DXY technical indicators moved lower into a bearish zone. The index fell beneath its 20-day Simple Moving Average (SMA), signaling a decrease in buying momentum. The Relative Strength Index (RSI) remains below 50, indicating a bearish trend but somewhat flattening. The Moving Average Convergence Divergence (MACD) indicator is displaying diminished green bars, suggesting weak buying pressure.
Support levels lie at 100.50, 100.30 and 100.00, while resistance is found at 101.00, 101.30 and 101.60.
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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