US Dollar rallies after ECB is forced to cut rates while US data comes in strong and upbeat

The US Dollar pops and makes its rally into a five day winning-streak.
Traders brace to hear from the Christine Lagarde after a 25 basis point rate cut from the ECB.
The US Dollar Index broke above a key level on looks to be on its way to 104.00.

The US Dollar (USD) adds to gains for a fifth consecutive day when looking at the US Dollar Index (DXY), which can be seen as the benchmark for the Greenback’s performance. China’s Housing Minister said on Thursday that the country will open a 4 trillion Yuan (CNY) funding to support its domestic housing market, a quite lower number than the initial 6 trillion Yuan communicated on Monday, and adds to momentum for the United States (US) former President Donald Trump to take more lead in the polls in the run-up to the November 5 Presidential Elections day.

The US economic calendar is halfway through with Jobless Claims sliding lower to 241,000 from 260,000, while US Retail Sales came in at 0.4%, beating the 0.3% estimate and the previous 0.1% from August. Meanwhile, the European Central Bank (ECB) has delivered another 25 basis point (bps) rate cut in accordance to consensus. Focus now shifts to the ECB President Christine Lagarde and if she dares to deliver a hawkish rate cut while Europe’s economic engine, Germany, is severely stuttering.

Daily digest market movers: Lagarde takes the stage

The US calendar has kicked off at 12:30 GMT with a bulk release of data:
- The weekly Jobless Claims:
  - Initial Claims for the week ending on October 11 came in at 241,000, lower than the 260,000 from the previous week.
  - The Continuing Claims for the week ending on October 4 came in at 1.867 million, lower than the expected 1.870 million.
- September Retail Sales:
  - The monthly headline Retail Sales grew by 0.4%, compared to the 0.3% expectation and the 0.1% in the previous reading.
  - The monthly Retail Sales, excluding cars and transportation grew by 0.5%, compared to the 0.1% expectation and the 0.2% in the previous reading.
- The Philadelphia Fed Manufacturing Survey for October jumped to 10.3, beating the 3.0 expectating, coming from 1.7 in September.
At 13:00 GMT, Federal Reserve (Fed) Bank of Chicago President Austan Goolsbee delivers welcoming remarks at the Fifth Annual Exploring Career Pathways in Economics and Related Field Conference.
At 13:15 GMT, the Fed releases the Industrial Production data for September, which is expected to shrink by 0.2% against the growth of 0.8% seen in August.
At 14:00 GMT, the National Association of Home Builders (NAHB) will release its monthly Housing Market Index for October. The expectation is for an uptick to 43 against the 41 from September.
The European Central Bank (ECB) will release its rate decision at 12:15 GMT, followed by a press conference where ECB President Christine Lagarde will deliver a speech and take Q&A around 12:45 GMT.
Both European and US equities are sprinting higher on the ECB rate cut and the upbeat US data.
The CME Fed rate expectation for the meeting on November 7 shows a 92.1% probability of a 25 bps rate cut, while the remaining 7.9% is pricing in no rate cut. Chances for a 50 bps rate cut have been fully priced out.
The US 10-year benchmark rate is trading at 4.06% after having flirted with a break below 4% on Wednesday.

US Dollar Index Technical Analysis: ECB rate cut widens the rate gap between EUR and USD

The US Dollar Index (DXY) is rallying with more and more headlines and media channels, starting to pick up on a possible Trump win in the US presidential elections in November. It looks like that trading desks are starting to hedge for that event, with the risk that the US Dollar will continue to rally into the event and can only reverse once it is done, no matter who won. Thus, a big attention point is that the DXY might become a “buy the rumour, sell the fact” event in the coming weeks.

A firm resistance is ahead at 103.79, which aligns with the 200-day SMA. Above that, there is a small gap before hitting the pivotal level at 103.99 and the 104.00 big figure. Should Trump further lead in the polls, a rapid swing up to 105.00 and 105.53 could be on the cards.

On the downside, the 100-day SMA at 103.20 and the pivotal level at 103.18 are now acting as support and should prevent the DXY from falling lower. With the Relative Strength Index in overbought territory, a test on this level looks granted. Further down, the 55-day SMA at 101.84 and the pivotal level at 101.90 should avoid further downside moves.

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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