US Dollar recovers earlier losses as uptick in US inflation sees inflow back into Greenback

The Greenback already lost over 1.6% of its value in October.
US CPI numbers are in line with expectations, though an uptick in headline inflation triggers US dollar buying.
The US Dollar Index settles below 106.00 and might break above if current turnaround continous.

The US Dollar (USD) is at a crucial point in terms of positions as its summer rally quite abruptly came to a halt and took a turn for the worse. The US Dollar was unable to advance substantially on Monday when risk-off sentiment was the main theme in the aftermath of the Israel-Hamas conflict. Since then the Greenback has been retreating, and the slew of Fed speakers this week that believe the Fed is done hiking are pouring only more oil to the fire.

Traders perceived the US Consumer Price Index (CPI) numbers as a reason to sell bonds and push the US Dollar Index (DXY) back up again. Overall most of the elements fell in line of expectations. The biggest trigger was the uptick in the Overall CPI number, which means prices in food and energy are ticking up again, which are out of control of the Federal Reserve.

Daily digest: US Dollar recovers

US CPI numbers rattled the markets with the following numbers to digest. Headline CPI for the month rose from 0.3% to 0.4%. The monthly Core inflation, without food and energy, was steady at 0.3%. For the yearly measures the headline remained unchanged at 3.7%, while the core measure dropped from 4.3% to 4.1%. It seems thus that inflation in food and energy is picking up again, and by chance those are the factors the Fed cannot controle with its policy rate.
Additionally, the weekly jobless claims came out: initial claims remained unchanged at 209,000. Continuing claims went from 208,750 to 206,250.
Equities are paring backing their earlier gains as the US Dollar Index soars and seems to kill any risk-on sentiment for now on the back of that CPI report.
The CME Group FedWatch Tool shows that markets are pricing in an 88.3% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
The benchmark 10-year US Treasury yield is sinking lower to 4.54%. The lowest level in nearly 10 days.

US Dollar Index technical analysis: CPI saves the day

The US Dollar has started to look bleak, and any chance for a quick recovery is hanging by a thread. Only a tick up in US inflation numbers for now did the trick and will grant the DXY another day near 106. It looks inevitable that the US Dollar Index (DXY) will need to look further down in order to find ample support before having a possible recovery bounce.

For a second day in a row, the DXY opens below 106, which means that this level will be the first initial hurdle to recapture. On the topside, 107.19 is important to reach if the DXY can get a daily close above that level. If this is the case, 109.30 is the next level to watch.

On the downside, the recent resistance at 105.88 did not do a good job supporting any downturn. Instead, look for 105.12 to keep the DXY above 105.00. If that does not do the trick, 104.33 will be the best level to look for some resurgence in US Dollar strength with the 55-day Simple Moving Average (SMA) as a support level.

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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