US Dollar touch softer while markets plan the next step for King Dollar

The US Dollar undergoes some profit taking ahead of a very light day in the economic calendar.
Markets embrace Fed Chairman Powell hawkish remarks and change of stance.
The US Dollar Index trades deep into the 106.00 area though, whitstanding a small pullback could be at hand.

The US Dollar Index (DXY) eases on Wednesday as it becomes increasingly clear that markets won the arm wrestling match with the US Federal Reserve (Fed). The recent upward moves in both US bond yields and the US Dollar were enough to twist the arm of US Fed Chairman Jerome Powell. Powell said on Tuesday that recent data shows a lack of further progress in taming inflation, and that it will take longer before having enough confidence that price growth is coming down to target before considering the first rate cut.

On the economic data front, no market-moving data is expected besides some second-tier numbers. More importantly, Fed speakers will take the stage right at the end of the US session, with Federal Reserve Bank of Cleveland President Loretta Mester and Federal Reserve Governor Michelle Bowman to speak.

Daily digest market movers: Time to digest and reassess

The weekly Mortgage Bankers Applications have be released for the week of April 12. Last week the index printed 0.1% with this week at 3.3% despite elevated rate levels.
The US Treasury is holding a longer-term bond auction at 17:00 GMT for a 20-year bond.
The Fed’s Beige Book will be released at 18:00 GMT.
At 20:00 GMT, the Treasury International Capital (TIC) Flows will be released for February:
- Net Long-Term TIC Flows expected to head from $36.1 billion to $40.2 billion.
- Total Net TIC Flows were in January at $-8.8 billion with no forecast available for February.
Two scheduled Fed speakers are scheduled for Wednesday:
- Federal Reserve Bank of Cleveland President Loretta Mester, around 21:30 GMT, participating in the South Franklin Circle Dialogues.
- Federal Reserve Governor Michelle Bowman is due to speak around 23:15 GMT at the Institute for International Finance in Washington D.C.
European and US equities are snapping the red numbers for this week and are mildly in the green with the Eurostoxx 50 as biggest winner, up 0.70% for this Wednesday.
According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the May meeting are at 94.6%, while chances of a rate cut stand at 5.4%. It looks like markets are easing off their most hawkish outlook.
The benchmark 10-year US Treasury Note trades around 4.65%. The benchmark is retreating from the highs at 4.69% seen on Tuesday.

US Dollar Index Technical Analysis: Easing for the next stage

The US Dollar Index (DXY) eases a touch on Wednesday. With Fed Chairman Powell confirming that it will take longer than expected to start lowering interest rates, some unwinding of the rally that took place in the DXY since last week’s Consumer Price Index numbers is likely. Expect a bit of a pullback, although the substantial wider rate differential between higher US rates and the rest of the world should keep the DXY at higher levels above 104.00.

On the upside, the fresh high of Tuesday at 106.52 is the level to beat first. 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, the first important level is 105.88, a pivotal level since March 2023, which proved its importance on Monday by holding as a support. Further down, 105.12 and 104.60 should also act as a support ahead of the region with both the 55-day and the 200-day Simple Moving Averages (SMAs) at 104.17 and 103.91, 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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