US Dollar rolls through markets after hawkish Fed, hot Canadian inflation creates tensions ahead of US PCE

The US Dollar trades at its highest level for this week after US economic data.
Fed's Bowman delivers ultra hakwish comments.
The US Dollar index trades in the green and pops back above 105.50.

The US Dollar (USD) jumps higher in a double-whammy moment where first US Federal Reserve member Michelle Bowman came out with hawkish moments saying that a rate cut is not in the prospects, pointing to risks for higher inflation. Not much later proof gets delivered on that with Canadian inflation coming in red hot, jumping from 2.7% to 2.9%, where 2.6% was expected. At that same time, the US House Price Index jumped higher as well, from 0.0% to 0.2% increase.

On the economic front, all eyes now on the Consumer Confidence after Retail Sales last week pointed to a very sluggish consumer in the US. Additionally, two US Federal Reserve (Fed) members will take the stage and might comment on the current monetary policy stance. One element to highlight as well on the agenda is the first presidential debate on Thursday between current US President Joe Biden and former US President Donald Trump.

Daily digest market movers: Markets being blind again

At 12:30 GMT, the Chicago Fed National Activity Index for May was released and came in at 0.18 from -0.26 in April.
At 13:00 GMT, the Housing Price Index for April got released. An uptick of 0.3% was expected after rising by 0.1% in March, though the April number came in at 0.2%, which overall still points to growth in House prices.
The Conference Board Consumer Confidence and the Richmond Fed Manufacturing Index for June were both released at 14:00 GMT. Consumer Confidence went from 102.00 in May to 100.40 in June. The Richmond Manufacturing Index missed the 2.0 consensus and fell into contraction to -10 from 0 previously.
Two US Federal Reserve officials will make their way to the stage:
- At 11:00 GMT, Federal Reserve Governor Michelle Bowman delivered a speech about the US monetary policy and bank capital reform at the Policy Exchange UK event in London, United Kingdom. She remained very hawkish by saying hikes are still on the table if needed, and there are still too many risks for upside surprises in inflation.
- At 16:00 GMT, Federal Reserve Governor Lisa Cook delivers a speech about the US economic outlook in a luncheon at the Economic Club of New York.
- To round up the day, at 18:10 GMT, Bowman delivers pre-recorded opening remarks at the Midwest Cyber Workshop hosted by the Federal Reserve Bank of St. Louis, Chicago, and Kansas City.
European equities set to close this Tuesday in deep red numbers while US equities are heading in the green ahead of the European closing bell, though the Dow Jones is an outlier.
The CME Fedwatch Tool is backing a rate cut in September, with odds now standing at 61.1% for a 25 basis point cut. A rate pause stands at a 32.3% chance, while a 50-basis-point rate cut has a slim 6.6% possibility.
The US 10-year benchmark rate trades at 4.24%, rather steady since the end of last week. The spread between the French and German 10-years benchmark has fallen from 0.79% to 0.74% and is easing a touch, though still the highest level in over six years.

US Dollar Index Technical Analysis: Back in range

The US Dollar Index (DXY) is trading float on Tuesday, with some risk-off out of Europe supporting the Greenback. Expect not to see any big waves ahead of the US Opening Bell as markets are starting to struggle with how to price the possible outcome from the French snap elections on Sunday. Traders will also be looking for NVidia to see how it behaves and if it can end its recent correction.

On the upside, the first level to watch is 105.88, which triggered a rejection at the start of May and on Friday last week. Further up, the biggest challenge remains at 106.52, the year-to-date high from April 16. A rally to 107.20, a level not seen since 2023, would need to be driven by a surprise uptick in the US inflation or a sudden hawkish shift from the Fed.

On the downside, 105.52 is the first support ahead of a trifecta of Simple Moving Averages (SMA). First is the 55-day SMA at 105.23, safeguarding the 105.00 round figure. A touch lower, near 104.66 and 104.48, both the 100-day and the 200-day SMA form a double layer of protection to support any declines. Should this area be broken, look for 104.00 to salvage the situation.

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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