US Dollar retreats after PPI triggers knee jerk reaction for the Greenback

The US Dollar touch softer after choppy trading during ECB rate decision and PPI release.
Traders jump into equities and send US equity in the green on the back of easing PPI numbers.
The US Dollar Index consolidates above 105.00, though starts to face pressure for a snap back below it.

The US Dollar (USD) is having a knee jerk moment with traders winding back a touch their positions in the Greenback after the hot Consumer Price Index (CPI) release from Wednesday. Reason is the Producer Price Index final reading for March which fell in line of estimates, while expectations were for another upbeat surprise. The fact that producers are seeing less severe inflation than the earlier CPI print, means for the coming CPI prints that there could still be some easing in the works here.

On the economic data front, all eyes now on the European Central Bank (ECB) meeting where Christine Lagarde will give more guidance on the latetst 'unchanged' stance of the ECB. Markets are still to hear from New York Fed President John Williams and Boston Fed President Susan Collins. A small repricing might be underway, should the Fed officials push back a bit against the extended move seen Wednesday.

Daily digest market movers: Chasing the tail

On the geopolitical front, China has sanctioned two US companies for allegedly selling arms to Taiwan, according to Bloomberg.
The European Central Bank has released its statement:
- The ECB’s Policy Rate decision was unchanged against the previous.
- At 12:45 GMT, ECB President Christine Lagarde kept her cards close to hear and did not wanted to comment on any timing, projections or on the Fed. Markets got concerned and erased intraday losses in EUR/USD for this Thursday.
A bulk load of US data has been released:
- Jobless Claims:
  - Initial Jobless Claims went from 214,500 to 214,250 for the week ending on April 5.
  - Continuing Jobless Claims data was for the week ending on March 29. A rise from 1.789 million to 1.817 million came in above expectations.
- The Producer Price Index (PPI) data for March:
  - Monthly headline PPI decline to 0.2% from 0.6%.
  - Yearly headline PPI came in at 2.1% from 1.6%.
  - Monthly core PPI was as expected at 0.2%, slowing from 0.3%.
  - Yearly core PPI jumped to 2.4% against 2.0% from February.
Federal Reserve Bank of New York President John Williams commented that tremendous progress has been made, though more needs to be done.
Another Fed speaker, Federal Reserve Bank of Atlanta President Raphael Bostic, will speak around 17:10 GMT.
US equities are jumping in the green once the ECB and PPI releases got digested. With the Greenback easing a touch, US equities are trading higher with the Nasdaq up 0.50% and other indices lagging.
After the hotter-than-expected US consumer inflation data released on Wednesday, expectations for a hold in the Fed’s interest rate at the June meeting increased sharply to over 80%, from roughly 40% before the release of the CPI figures.
The benchmark 10-year US Treasury Note trades around 4.54%, softening a touch.

US Dollar Index Technical Analysis: Central Banks scramble

The US Dollar Index (DXY) snaps above 105.00 for the first time this year and sets the bar at a fresh five-month high around 105.32. As the Fed could now keep interest rates steady longer than other major central banks, the rate differentials will start to kick in, seeing ample amounts of more US dollar strength ahead.

With Wednesday’s seismic move, fresh levels need to be pencilled in for more upside. The first level is the November 10 high at 106.01, just above the 106.00 figure. Further up and above the 107.00 round level, the DXY Index could meet resistance at 107.35, the October 3 high..

On the downside, fresh support levels need to be pencilled in as well, with the first important level at the 105.00 big figure, which can see the DXY Index orbiting around it, snapping back below and above it, for a brief amount of time. Further down, 104.60 should also act as a support, ahead of the region with both the 55-day and the 200-day Simple Moving Averages at 103.97 and 103.84, respectively.

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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