US Dollar starts the week on the backfoot after Yen delivers blow to US Dollar in early Monday trading

The US Dollar trades substantially softer, touching a seven-month low, at the start of the week.
The Greenback continues eking out losses after Friday’s turmoil.
The US Dollar index trades on the brink of entering the 101-region and might face more downside.

The US Dollar (USD) trades substantially softer this Monday, touching its lowest level since mid-January, mainly driven by a more than 1% appreciation of the Japanese Yen (JPY) against the Greenback. . The Commodity Futures Trading Commission (CFTC) reported on Friday that hedge funds are net long on the Japanese Yen, and Asian and European investors seem to follow through on Monday. . As the Japanese Yen accounts for 13.6% of the US Dollar Index (DXY), the rise weighs on the index’s performance this Monday, pushing it to lows not seen in roughly seven months.

On the economic data front, a rather soft start for the data this week where all eyes will be on Wyoming at the end of the week for the annual US Federal Reserve’s Jackson Hole Symposium. The event will have the crème-de-la-crème of central bankers speaking, including Fed Chairman Jerome Powell, and is known for being the occasion for the Fed to signal a change in monetary policy outside of its scheduled meetings. In the run-up to that event, several headlines will come out from other central bankers, and the US Purchasing Managers Index (PMI) data on Thursday will give the latest insights about the state of the economy.

Daily digest market movers: Is it Friday yet?

President of the Federal Reserve Bank of Minneapolis Neel Kashkari said to the Wall Street Journal that inflation is making progress.
The Commodity Futures Trading Commission (CFTC) issued on Friday its weekly holding of speculative and non-speculative positions in currency futures markets. The report revealed that hedge funds are net long JPY for the first time since 2021.
This week kicks off with comments from Federal Reserve Governor Christopher Waller, who delivers welcoming remarks at the 2024 Summer Workshop on Money, Banking, Payments, and Finance in Washington, D.C at 13:15 GMT.
The US Treasury is allocating a short-term 3-month and 6-month bill at 15:30 GMT.
Asian equity markets are mixed, with Chinese indices up nearly 1%, while Japanese equities are sliding over 1% lower. European equities are also looking for direction while US futures are trading flat.
The CME Fedwatch Tool shows a 72% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 28% chance for a 50 bps cut. Another 25 bps cut (if September is a 25 bps cut) is expected in November by 53.7%, while there is a 39.2% chance that rates will be 75 bps below the current levels and a 7.1% probability of rates being 100 basis points lower.
The US 10-year benchmark rate trades at 3.87% and is looking for direction after last week’s dip.

Economic Indicator

Fed's Chair Powell speech

Jerome H. Powell took office as a member of the Board of Governors of the Federal Reserve System on May 25, 2012, to fill an unexpired term. On November 2, 2017, President Donald Trump nominated Powell to serve as the next Chairman of the Federal Reserve. Powell assumed office as Chair on February 5, 2018.

US Dollar Index Technical Analysis: Hedge funds are piling in

The US Dollar Index (DXY) looks very bleak, and chances of recovery seem low. With this new information from the CFTC, traders have to ask themselves where they see the DXY heading to, considering that hedge funds will not pile into a currency on the back of some feeble belief.

Hedge funds are always in it to sit on their positions until their earnings projection is met. Seeing that this is just the beginning, and with more and more hedge funds and traders possibly joining this trade, the US Dollar could be set to bleed further. This could mean more downside, and then that 100-level might be showing up quicker than expected.

Defining pivotal levels becomes very important in order to avoid any “dead-cat bounces,” in which traders pile in too quickly in a trade and get caught on the wrong side of the fence once the course reverses. First up is 103.18, a level that traders were unable to hold last week. Next up, a heavy resistance level is at 103.99-104.00, and inches above there is the 200-day Simple Moving Average (SMA) at 104.07.

On the downside, the first immediate support comes up at the 101.90 level if prices breach below 102.00. Levels not seen since early January are popping up, and even a fresh yearly low could come into play once the DXY dips below 101.30 (low from January 2). The low of December 28 at 100.62 will be the ultimate level to look out for.

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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