US Dollar sinks 3% against Yen with stocks falling through the floor

The US Dollar falls through the floor with US equities entering correction territory as well.
Markets are spooked by recession fears after several worrying US data releases last week.
The US Dollar index falls below 103.00 on Monday after a bad Asian session.

The US Dollar (USD) is picking up speed in its decline on Monday with the US session approaching, after the European session was able to keep the Greenback stable for a few hours. The main trigger is the gruesome performance of the Japanese Nikkei and Topix Indices, which closed down over 12% in blood-red numbers. For the Nikkei, it is the worst performance since 1987, pushing investors and traders into safe-haven bonds. With falling yields, the US Dollar is losing its strength as a batch of weak US economic data and lower yields no longer make the Greenback shine.

On the economic front, the week starts with a big batch of data from the Institute of Supply Management (ISM). Traders will be shaking in their boots as the numbers come out, as another batch of disappointing data could further confirm the recession narrative. Luckily, this week does not hold any further first-tier data points, so dust could settle later in the week.

Daily digest market movers: Can the Fed salvage?

President of the Federal Reserve Bank of Chicago Austan Goolsbee came out with suprise comments to calm markets by saying that the Fed is not seeing or forecasting a recession and that one jobs report is not enough to be fueling concerns.
Markets are in panic mode on Monday after Japanese indices closed down by over 12%. Traders even priced in a 60% chance for an emergency rate cut in August at one point, Bloomberg reported. The Greenback is down near 3% against the Japanese Yen.
At 13:45 GMT, the final readings of the S&P Global Purchasing Managers Index (PMI) for July will be released:
- Services PMI is expected to come at 56.
- The Composite number is expected to remain stable at 55.
At 14:00 GMT, the Institute for Supply Management (ISM) will release its numbers for July:
- The Services Employment Index is expected to head to 46.5 from 46.1.
- Services New Orders Index was at 47.3 previously, with no forecast available.
- The Services PMI should head out of contraction to 51 from 48.8.
- Services Paid Index should ease a touch to 55.8 from 56.3.
Equity markets are falling out of bed on Monday, with the Japanese Nikkei facing its worst performance since 1987. US equities are down with the Nasdaq leading the charge with a near 5% decline. European equities are facing milder losses, down 3.0% on average.
The CME Fedwatch Tool shows a 96.5% chance of a 50 basis points (bps) interest rate cut by the Federal Reserve in September. Another 50 bps cut is expected in November by 78.6%, while a 20.6% chance of just a 25 bps cut is priced in that month.
The US 10-year benchmark rate trades at a new 52-week low at 3.69%.

US Dollar Index Technical Analysis: Keep calm and look ahead

The US Dollar Index (DXY) has cracked under pressure after the underperforming US economic data releases last week. On Monday, the equity rout continues and drags the Greenback lower. There are no clear support levels nearby, although the Relative Strength Index (RSI) points to the end of the sell off, with losses in Europe and the US for now being contained on the equity markets.

The recovery will be in three tiers, with the first up at 103.18, which was held on Friday though snapped on Monday in the Asian hours. Once the DXY closes above that level, next up is 104.00, which was the support from June. If the DXY can make its way back above that level, the 200-day Simple Moving Average (SMA) at 104.22 is the next resistance level to look out for.

On the downside, the oversold RSI already should refrain the DXY from making more hefty losses. Support nearby is the March 8 low at 102.35. Once through there, pressure will start to build on 102.00 as a big psychological figure, before testing 101.90, which was a pivotal level back in December 2023 and January 2024.

US Dollar Index: Daily Chart

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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