US Dollar advances as markets digest fresh data

Durable Goods revision and higher US Treasury yields propel Greenback which stands near two-year highs.
Consumer Confidence dipped but the Dollar holds gains.
Shutdown threat keeps investors cautious which might limit the upside.

The US Dollar Index, which measures the value of the USD against a basket of currencies, is off to a positive start on Monday after a sluggish morning session. Upward revisions from the preliminary November Durable Goods release are fueling a stronger Greenback, pushing the index near 107.90, just shy of its two-year high above 108.00.

Daily digest market movers: US Dollar continues rising ahead of Christmas

Government shutdown risks grow as lawmakers fail to pass a stopgap bill. Though a short shutdown may have limited market impact, investors remain on alert for last-minute deals.
Longer-term yields climb further, with 10-year Treasury rates nearing 4.60% and 30-year yields hitting 4.77%. The short end lags, steepening the yield curve.
On the data front, the Chicago Fed National Activity Index from November improved to -0.12 from -0.40, hinting at a less negative overall economic picture.
November Durable Goods preliminary data showed a -1.1% print, but the prior figure was revised up from 0.3% to 0.8%, boosting the USD. Excluding transportation, orders dipped 0.1%.
Consumer Confidence for December fell to 104.7 from 111.7, partially offset by an upward revision for November to 112.8. Despite the decline, the Dollar remains bid into year’s end.

DXY technical outlook: Indicators eye overbought territory

The Dollar Index has regained upward traction, with technical indicators pointing to renewed momentum. As the DXY inches closer to its two-year high, oscillators suggest the index is moving toward overbought levels. Nonetheless, the broader bullish bias remains intact as long as the price holds above the key support of 106.00. A sustained break above the latest peak could open the door to further gains, though thin holiday liquidity may lead to choppy price action in the near term.

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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