US Dollar gets hammered as US PMI points to a contraction on all fronts

US Dollar price action stalls after PMI numbers erase the intraday built-up gains.
Fed members repeat the same message, foreshadowing an unchanged message from Powell at Jackson Hole on Friday.
The US Dollar Index strengthens as hope dampens for any near-term rate cuts.

The US Dollar (USD) is getting choppy again after being firmly up against most peers, now flat on most after US Purchase Managers Index numbers are pointing to a slowdown in activity. The 180-degree change in sentiment just hours after the US opening bell had rung was the sum of headlines on Tuesday. Fed officials are keeping their mouths firmly shut on rate cuts. The BRIC meeting on dedollarization has a few important countries speaking out in favor of keeping the US Dollar as a trade currency. Last but not least, some geopolitical tensions trigger Greenback favor during US trading hours.

All eyes are on the chunky data calendar this Wednesday with the S&P Purchase Managers Index (PMI). New homes sales to come out as well and could confirm the slowdown in the housing sector, which was the key takeaway from the existing home sale numbers on Tuesday. Watch out for more headline risks today as chipmaker Nvidia is due to deliver earnings, which could make or break the current risk-on sentiment in equity markets.

Daily digest: US Dollar sees its gains being sponged over

While the US 10-year yield retreats off the highs, the 30-year fixed mortgage rate jumps to 7.31%, highest since 2000.
The US economic calendar started at 11:00 GMT with the weekly Mortgage Bankers Association (MBA) Mortgage Applications for the week of August 18. The applications sunk from -0.8% to -4.2%.
At 13:45 GMT S&P printed its Purchasing Managers’ Index (PMI): Services PMI numbers went from 52.3 to 51 against a 52.2 consensus. Manufacturing heads further into contraction from 49 to 47 where 49.3 was expected. The overall composite drops from 52 to 50.4 and is thus pointing to a stand still. It looks like the Fed's rate choke hold with higher for longer is starting to bite into the economic activity.
At the stroke of 14:00 GMT, New Home Sales numbers came out. An uptick here from 684K to 714K where 705K was expected.
This Wednesday, the US Treasury Department will auction a 20-year bond.
The BRICS convention starts its second day in South Africa with the organisation welcoming nearly 20 new members. The major theme will be the discussion on dedollarization and the setup of a payment system between the nations. India, Brazil and South Africa have already came out opposing the idea of disregarding the US Dollar, making the meeting as such a non-event and no threat yet for the Greenback as trade currency.
Equities are up across the board, be it with mild gains and no real outliers. Equity markets are on the lookout for Nvidia earnings, which could make or break the current tech rally for NASDAQ and possibly spill over into the other indices and stock markets across the globe.
The CME Group FedWatch Tool shows that markets are pricing in an 86.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September.
The benchmark 10-year US Treasury bond yield trades at 4.25% after touching a new yearly high on Tuesday. The bond market will be very sensitive to any news on Friday at the Jackson Hole Symposium. The whole US yield curve could move up or down depending on the speech from Fed Chairman Jerome Powell.

US Dollar Index technical analysis: DXY dies with 104 in sight

The US Dollar was defying friend and foe after it rallied firmly in the US trading session, erasing all earlier gains. The US Dollar Index (DXY) was even briefly in distress during the European session when it broke below the important 200-day Simple Moving Average (SMA). In a skateboard, 180-degree flip, the DXY was able to eke out gains and even print a fresh two-month high at 103.71 and does not seem to stop again this Wednesday.

On the upside, 104.00 is the level to reach. The high of Friday at 103.68 is vital and needs to get a daily close above it in order for the DXY to eke out more monthly gains. Should this US Dollar strength persist for the last part of this year, May’s peak at 104.70 could become the reality again.

On the downside, several floors are likely to prevent a steep decline in the DXY. The first one is the 200-day Simple Moving Average (SMA) at 103.18, which already broke Tuesday and Wednesday. Passing below the 103.00 figure, some room opens up for a further drop. However, around 102.38 both the 55-day and the 100-day SMAs await to catch any falling knives.

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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