US Dollar volatility peaks as US CPI remains sticky and leaving traders puzzled

The US Dollar sees its gains from earlier this week under pressure.
US July Consumer Price Index is nearly unchanged on all fronts and points to no big slowdown in US inflation.
The US Dollar Index drops lower and with a possible new weekly low nearby, though it is already paring back losses just minutes after the numbers came out.

The US Dollar (USD) deepened out earlier losses as traders and market digested the US inflation data points together with the weekly jobless statistics. In an initial move on the back of the data, the Greenback takes it on the chin. The US Dollar Index (DXY) meanwhile is erasing its gains from earlier this week and could flip its earnings into a loss for the rest of the week, though some paring back is coming into play.

The focal point today was at 12:30 GMT with the all measures for the Consumer Price Index (CPI) both for the core and overall in line with expectations on a yearly basis. The monthly price pressures look to be persistent and are still seeing inflationary pressures present. The cherry on the cake is right at the end at 19:00 GMT when Federal Reserve (Fed) speakers Raphael Bostic from Atlanta and Patrick Harker from Philadelphia are due to speak and comment on Thursday’s inflation numbers and what they could mean for the central bank’s September policy meeting.

Daily digest: US Dollar receives a blow

At 12:30 GMT US inflation numbers came out with the monthly overall CPI at 0.2%, in line with expectations and unchanged frm previous month. Similar for the core CPI at 0.2%. For the yearly performance, overall CPI went from 3.0% to 3.2%, which is a slight uptick. The core CPI on a yearly base went 0.1% lower from 4.8% to 4.7%. Initital reaction for the US Dollar was a big move weaker, though starts to pair
In all the noise of the US CPI publication, the US Labor department issued the weekly jobless claims: Initial jobless claims went higher to 248k, from 227k. The Continuing claims went lower from 1,700k to 1,684k.
The US treasury is heading back to the markets to refinance some debt with a 4-week bill and a 30-year bond auction.
Markets could quickly see the Fed stepping in and put a lid on any undesired move in the markets on the back of the CPI numbers. Fed speakers Bostic and Harker are due to speak at 19:00 GMT and could deliver some guidance on what the recent US CPI numbers could or could not mean for the Fed’s decision in September and beyond.
The Japanese Topix index nearly closed up 1%, while the Chinese Hang Seng closed unchanged. European equities are more than happy to take over the positive sentiment from Asia with the German DAX and European Stoxx 50 trading nearly 1% in the green. US equity futures are no different and point to a green opening for Wall Street.
The CME Group FedWatch Tool shows that markets are pricing in an 86.5% chance that the Federal Reserve will pause interest rate hikes at its meeting in September. In case the US CPI numbers point to a further inflation decline, that chance might increase to a 90% probability or more.
The benchmark 10-year US Treasury bond yield trades at 3.97% and is very steady since Wednesday.

US Dollar Index technical analysis: bears fell in the trap

The US Dollar went against the canvas when the US inflation numbers came out, triggering a knock-out swing. Though minutes after the numbers came out and dust starts to settle, the US Dollar Index (DXY) is off the low for today and could head back into the green in a knee jerk reaction. The earlier weaker Greenback in early morning trading on Thursday was thus a perfect buy-the-rumor-sell-the-fact strategy where US Dollar bears now fell into the trap as fear of missing out (FOMO) is making them closing their positions at a loss, favoring a posisble higher DXY in the coming hours in the aftermath of the initial CPI move.

For the upside, 102.42 – where the 55-day Simple Moving Average (SMA) is located – is again in play on the upside. This level needs to be broken yet again and needs to see a full daily close above before starting to think about 103. To do so, the double peak near 102.80 needs to be broken as well and print a new monthly high.

On the downside, bears have already breached the defence line of the US Dollar bulls at 102.31 - at the 100-day SMA - earlier this Thursday. Should the US CPI numbers support a weaker Greenback, expect to see some sharp losses in a few specific pairs or crosses against the USD. Expect 102 to come under pressure, and once the low of last week at 101.75 gets breached, expect this to be the end of the DXY rally for now.

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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