- The US Dollar trades up ahead of a quiet US economic calendar.
- Markets seem to turn risk-off ahead of Nvidia earnings, benefiting the Dollar and weighing on Chinese tech stocks and cryptocurrencies.
- The US Dollar Index edges up slightly, trading just below 101.00 for a second day in a row.
The US Dollar (USD) erases all incurred losses from past Friday's speech given by Federal Reserve Chairman Jerome Powell, with markets nervous ahead of Nvidia Corp. (NVDA) earnings to be released after the US closing bell and even recession fears trending again. Seeing the recent slowdown in some economic numbers and with the boom around Artificial Intelligence (AI) having eased a touch, traders wonder if Nvidia can keep up its pace of growth and its streak of beating earnings. A miss on estimates could spark some sharper risk-off moves, a scenario that would put the US Dollar back in the graces of traders with safe-haven flows unfolding.
On the US economic calendar front, nearly no data points for markets to digest on Wednesday. This adds to more tension and expectations for the Nvidia earnings. Even Federal Reserve officials aren’t expected to make an early appearance, with only Federal Reserve Bank of Atlanta President Raphael Bostic set to speak at 22:00 GMT.
Daily digest market movers: More to come?
- At the US Opening Bell, the US Dollar prints a session's high in the US Dollar Index with traders becoming nervous on Nvidia (NVDA) earnings. Several daily e-mails and briefs from banks and analysts are bearing making the word 'recession' trending again on this Wednesday.
- At 11:00 GMT, the Mortgage Bankers Association has released its weekly Mortgage Applications Index, this time for the week ending August 23. The week before, the index posted a steep decline of 10.1% with the most recent number coming in at 0.5%.
- The US Treasury is auctioning a 5-year note around 17:00 GMT.
- Federal Reserve Bank of Atlanta President Raphael Bostic participates in a moderated conversation and Q&A about the US economic outlook at the Stanford Club of Georgia at 22:00 GMT.
- Equities in Asia got dragged lower due to Chinese tech stocks dipping ahead of Nvidia earnings later this Wednesday. Both European and US indices are rather flat.
- The CME Fedwatch Tool shows a 63.5% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 36.5% chance for a 50 bps cut. Another 25 bps cut (if September is a 25 bps cut) is expected in November by 42.5%, while there is a 45.4% chance that rates will be 75 bps (25 bps + 50 bps) below the current levels and a 12.1% probability of rates being 100 (25 bps + 75 bps) basis points lower.
- The US 10-year benchmark rate trades at 3.83%, quite stable for the second day in a row.
US Dollar Index Technical Analysis: DXY in recovery mode
The US Dollar Index (DXY) is seeing a very odd driver dictating direction. The assumption is very easy: should Nvidia earnings beat expectations again, a new wave of risk-on flows will likely push equities higher and the US Dollar lower. If earnings fall in line with expectations or below them, the US Dollar is expected to rally and risk-off flows would send equities south.
For a recovery, the DXY faces a long road ahead. First, 101.90 is the level to reclaim. A steep 2% uprising would be needed to get the index to 103.18 from the current 101.00. A very heavy resistance level near 104.00 not only holds a pivotal technical value, but it also bears the 200-day Simple Moving Average (SMA) as the second heavyweight to cap price action.
On the downside, 100.62 (the low from December 28) tries to hold support, although it looks rather feeble. Should it break, the low from July 14, 2023, at 99.58 will be the ultimate level to look out for. Once that level gives way, early levels from 2023 are coming in near 97.73.
US Dollar Index: Daily Chart
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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