US Dollar stops the bleeding as Retail Sales revisions show resilient outlook
|- US Retail Sales saw a slight uptick in June.
- USD's overall outlook still remains skewed to the downside due to dovish bets on the Fed.
- Markets remain confident about a September cut.
On Tuesday, the US Dollar, as measured by the DXY index, saw some gains following promising results in June’s Retail Sales figures reported during the European session.
That being said, the US economic outlook shows indications of disinflation, bolstering the markets' confidence in a rate cut in September. Federal Reserve officials, however, are maintaining a cautious stance, emphasizing their reliance on data before making any significant moves.
Daily digest market movers: DXY sees some light following encouraging Retail Sales, outlook still negative
- As the week began, the USD found itself under pressure due to the effect of the previous week's inflation statistics, which fueled confidence among traders for a likely rate cut in September.
- On the data front, retail sales remained flat at 0.0%, though the previously reported increase of 0.1% was revised upward to 0.3%.
- Retail Sales ex Autos rose by 0.4% after the 0.1% decline in May. That same -0.1% has been revised to 0.1%.
- The CME FedWatch Tool broadly supports the notion of a rate cut in September, with the odds currently standing over 85% for a 25-basis-point cut.
DXY Technical Outlook: Bearish attitude steady while bulls make a stride to recover the 200-day SMA
The outlook for the USD remains bearish despite the DXY index regaining the 200-day Simple Moving Average (SMA). Technical indicators such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are both deep in negative terrain, suggesting it’s the seller's time now.
Despite losing more than 0.80% towards the end of last week, a slight upward correction may occur. Nonetheless, the bullish momentum gained on Tuesday is fragile, making the overall technical outlook decidedly bearish.
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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