US Dollar falls back to flat with ISM not bearing any surprises to move the needle in any direction

The US Dollar turns flat in its first trading session for this week.
US markets open up after the Labor Day holiday and see ISM PMI data not delivering any surprises.
The US Dollar Index has an important resistance level within reach for a breakout.

The US Dollar (USD) trades broadly stable on Tuesday as it officially starts its trading week after US markets were closed on Monday for Labor Day. The Greenback is slightly up against almost every major currency on the quote board, except for the Japanese Yen (JPY). Meanwhile, markets tremble a little bit on the back of news that German car maker Volkswagen is considering closing factories in its home country for the first time ever, which is a massive blow to the German government and the European economy.

Tuesday’s economic calendar features the Institute for Supply Management (ISM) Manufacturing survey for August. Markets were starting to expect again some outperformance from the number, seeing last week's data came in often stronger than expected for the US Not thus for the US ISM results which were a touch softer and very much in line of expectations.

Daily digest market movers: ISM not moving the needle

As the European car story develops with earlier Volkswagen committing to closing down factories in Germany, Audi now joins the list by closing down its Belgian site.
At 13:45 GMT, S&P Global has released its final Manufacturing number from the Purchasing Managers Index for August. The final reading came in at 47.9 against the 48.0 in its first reading.
At 14:00 GMT, the Institute for Supply Management (ISM) released its Manufacturing numbers for August:
The headline PMI came in at 47.2 from 46.8, missing the 47.5 expectation.
The Prices Paid component went from 52.9 to 54.0.
The New Orders index stood at 47.4 in July and fell to 44.6 for August, and the Employment Index was at 43.4, ticking up to 46 for August.
Apart from the ISM, the TechnoMetrica Institute of Policy and Politics (TIPP) released its economic Optimism survey for September. The previous reading was at 44.5 with 46.1 for this month's number.
Both US and European equities are on the backfoot after those German headlines around Volkswagen. Markets fear another downturn in Manufacturing globally instead of just locally in Europe.
The CME Fedwatch Tool shows a 69.0% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 31.0% chance for a 50 bps cut. Another 25 bps cut (if September is a 25 bps cut) is expected in November by 49.9%, while there is a 41.5% chance that rates will be 75 bps (25 bps + 50 bps) below the current levels and an 8.6% probability of rates being 100 (25 bps + 75 bps) basis points lower.
The US 10-year benchmark rate trades at 3.83%, substantially lower on the day after opening at 3.93%.

US Dollar Index Technical Analysis: ISM not clear picture

The US Dollar Index (DXY) is at a crossroads this Tuesday, when the ISM numbers might be moving the DXY either above a pivotal resistance or trigger a firm rejection and send it back down. Expect to see a very whipsaw DXY on the charts this week with nearly every trading day bearing substantial economic data points.

Looking up, 101.90 is very close and could easily be broken should ISM come in stronger. A steep 2% uprising would be needed to get the index to 103.18. A very heavy resistance level near 104.00 not only holds a pivotal technical value, but it also bears the 200-day Simple Moving Average (SMA) as the second heavyweight to cap price action.

On the downside, 100.62 (the low from December 28) holds as support, although it looks rather feeble. Should it break, the low from July 14, 2023, at 99.58 will be the ultimate level to look out for. Once that level gives way, early levels from 2023 are coming in near 97.73.

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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