US Dollar plunges on soft NFPs from July

US Dollar suffers following July's disappointing jobs report, which sparks increased expectation in September rate cut.
If data continues to show progress, the Fed signals readiness to respond to signs of weakness in the US economy.
CME FedWatchTool indicates a 90% chance of a cut in September.

The US Dollar (USD), as gauged by the DXY index, experienced heavy selling pressure following the July jobs report on Friday, sliding to lows not seen since March near 103.20.

With a September rate cut seemingly in sight, any signs of vulnerability in the US economic landscape could weigh on the USD and increase dovish sentiment toward the Federal Reserve (Fed).

Daily digest market movers: The US Dollar dips on July's weak jobs growth

US Nonfarm Payrolls (NFP) grew by just 114K in July, falling short of the market expectation of 175K and significantly below June's downwardly revised growth of 179K (from 206K), according to the US Bureau of Labor Statistics (BLS) report on Friday.
Additional figures from the report showed that the Unemployment Rate inched up to 4.3% in July from 4.1% in June.
Concurrently, Average Hourly Earnings' annual wage inflation decreased to 3.6% from 3.8%.
The weak demand for labor in the US, underscored by these figures, has piled pressure on the USD, increasing expectations that the Fed will start to cut interest rates in September.
The CME FedWatch Tool now shows that traders predict a 90% chance of a half-point Fed rate cut in September.

DXY technical outlook: Index outlook turns bearish amid concerning data

The DXY outlook has taken a turn for the worse after the disappointing jobs report. The index slid significantly below both the 20-day and 200-day Simple Moving Averages (SMAs), which are on the brink of a bearish crossover near 104.00.

The momentum-based Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) also took substantial hits, indicating a surge in selling pressure.

The DXY index now finds support at 103.00, 102.50 and 102.30, with resistance levels positioned at 103.50 and 104.00.

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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