US Dollar trades downwards as dovish bets on the Fed increase

Weak labor data led to a decline in the US Dollar during Thursday session.
Initial Jobless Claims remained at 230K, indicating a persistent labor market.
PPI fell short of expectations, signaling a potential easing of inflation, which also added to the USD’s downside.

The US Dollar Index, which measures the value of the USD against a basket of six currencies, is posting daily losses after soft labor and inflation data.

Despite positive economic indicators, current market valuations may be overly optimistic. Recent data reveals that the US economy remains robust, expanding at a rate exceeding expectations.

Daily digest market movers: DXY down after inflation and labor data

The US Dollar declined against its major rivals amid dovish signals from the latest US labor market and inflation reports.
Initial Jobless Claims, a proxy for layoffs in the US, increased to 230K in the week ended September 7, matching estimates and slightly above the prior week's upwardly revised 228K.
The advance seasonally-adjusted insured unemployment rate remained unchanged at 1.2%, and the 4-week moving average rose to 230.75K.
The Producer Price Index (PPI) for final demand in the US rose 2.2% YoY in July, below the 2.3% market forecast and the previous 2.7% increase.
The annual core PPI rose 2.4%, missing the 2.7% consensus estimate. On a monthly basis, the PPI increased 0.1%, while the core PPI remained flat.
The CME FedWatch tool indicates a 13% probability of the Fed cutting interest rates by 50 basis points in September, unchanged from before the PPI release.
These reports suggest that the US labor market remains resilient despite economic headwinds, while inflation pressures may be moderating, supporting the Fed's dovish stance.

DXY technical outlook: DXY resumes downside, breakout improves outlook

Technical analysis indicators for the DXY index have resumed their downward trend in negative territory. However, on Tuesday, the index regained the 20-day Simple Moving Average (SMA) at approximately 101.60. This breakout has improved the short-term outlook, and the immediate task for buyers is to hold this level.The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) indicators remain in negative territory, suggesting bearish momentum. However, both indicators are showing some signs of upward movement, which could indicate a potential reversal in trend.

Supports are located at 101.60, 101.30 and 101.00. Resistances are found at 101.80, 102.00 and 102.30.

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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