US Dollar hits the brakes, tallies a winning week

US Dollar weakens on Friday due to profit-taking.
Fed speakers set to comment on monetary policy on Friday, which might set the late session’s pace.
US housing data shows a decline in Building Permits and Housing Starts.

The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, is declining on Friday as profit-taking sets in following a strong rally earlier in the month. The US Dollar retreat comes ahead of a series of speeches by Fed officials on Friday, which could provide further insight into the central bank's monetary policy stance. Additionally, US housing data released on Friday morning showed a decrease in Building Permits and Housing Starts, indicating a potential slowdown in the housing market.

Despite a period of deceleration, the economy has demonstrated signs of strength, and the Federal Reserve (Fed) has indicated that its approach to monetary policy will be guided by the evolving economic data.

Daily digest market movers: US Dollar declines on profit-taking, eyes on Fed speakers

On the data front, US Building Permits dropped to 1.428 million, down from 1.47 million in August, while Housing Starts decreased to 1.354 million compared to 1.61 million previously.
Three Fed members, Raphael Bostic, Neel Kashkari and Christopher Waller, are scheduled to give speeches. Investors will look for clues on the Fed’s evolving monetary policy, though the market largely expects two 25 bps cuts in November and December.
Swap futures suggests that the markets are seeing two cuts by the Fed for the rest of 2024. The US 10-year benchmark rate stabilized near 4.10%.

DXY technical outlook: DXY consolidates, faces resistance at 200-day SMA

The DXY index faced resistance at the 200-day SMA, leading to a period of consolidation. The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) have flattened in positive territory, indicating neutral momentum. As expected, the DXY might enter into a correction period after a furious rally, which took the index from 100.30 to near 104.00.

Supports are located at 103.50, 103.30 and 103.00, while resistances lie at 103.80, 104.00 and 104.30.

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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