US Dollar starts the week firm as markets await FOMC decision

US Dollar displays strength ahead of Wednesday Fed decision and labor market data.
Fed is expected to remain data-dependant but leave door open for September cut.
Markets are extremely confident about a September cut of 25 bps.

The US Dollar represented by the DXY index charged forward on Monday despite looming uncertainties. The market remains on edge with September's potential rate cut by the Federal Reserve (Fed) somewhat uncertain, but optimism surrounding the US economy's strength is tempering anxieties. The Fed decision on Wednesday and labor market data will guide markets this week.

There is growing evidence of disinflation in the current US economic landscape, which solidifies the market's belief in a prospective rate cut in September. However, the broader economy demonstrates strength, as is made evident by recent data surprises like the Q2 Gross Domestic Product (GDP) and July S&P Global PMIs, which might give the Fed reasons not to rush a rate cut.

Daily digest market movers: US Dollar firms ahead of July labor data and FOMC meeting

Two-day FOMC meeting concludes on Wednesday with a plausible commitment to unchanged rates
Market players recognize the solid performance of the US economy warrants no immediate action by the Fed, but September FOMC meeting is predicted to bring a potential rate cut into the spotlight
Chair Powell's press conference has the potential to sway markets, but his precedent of focusing on labor market uncertainty is likely to continue
In that sense, labor market data to be released throughout the week will guide market bets regarding the September decision

DXY technical outlook: Bearish signs stall as index inches toward 20-day SMA

Pushing past initial signs of struggle, DXY Index is now rebounding from 200-day Simple Moving Average (SMA). The 20-day SMA is now viewed as the next target. However, key indicators such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), though still in the red, are inching toward positive terrain.

Continued support is noted at 104.30 and 104.15 levels, while resistances are observed at 104.60 and 104.80 levels.

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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