US Dollar retreats in US session with tensions building up towards Milwaukee GOP rally

The US Dollar ranges after further easing in European session.
Former US President Trump was injured in a shooting during a political rally.
The US Dollar index jumps higher, it is on the way to fill the gap.

The US Dollar (USD) opened with a shock at the start of the week on pressure from Dollar bulls, who wanted to buy the Greenback as a safe haven after former US President Donald Trump was shot during an election rally. Trump was injured in the ear but is doing well, and he is set to give a speech later this Monday. The events made the bond market rally, with Trump’s popularity set to surge now, outpacing current US President Joe Biden.

On the economic front, expect this week that the different data points will be overshadowed by headlines from what happened over the weekend and with the rallies taking place, especially where Trump will attend. Besides that, it is a soft start for the week, where US Retail Sales data for June, scheduled on Tuesday, will play the leading role. US Federal Reserve (Fed) Chairman Jerome Powell will enter an interview with David Rubenstein on Bloomberg later on Monday.

Daily digest market movers: Milwaukee center of attention

Markets are trying to price in the events that took place over the weekend. Bond markets are selling off with higher yields, a similar move we saw a few weeks ago when former US President Donald Trump took the lead in the polls. Bond markets are worried about Trump's spending plans, which could cause the US deficit to proportions never seen in US history. Investors are selling off their US debt in the idea that it might devalue or, in the worst case, might even never be paid back.
former US President Donald Trump is set to speak on the Republican National Convention this Monday in Milwaukee.
At 12:30 GMT, the NY Empire State Manufacturing Index for July was released and came in little changed from -6 to -6.6.
At 20:35 GMT, Federal Reserve Bank of San Francisco President Mary Daly participates in the "Fortune Brainstorm Tech 2024" session "The Bull, the Bear, and the Banker" with Fortune's Emma Hinchliffe in Utah, United States.
US Federal Reserve Chairman Jerome Powell will be interviewed by David Rubenstein at the Economic Club of Washington, DC.
Equity markets are very binary on Monday. Both Asian and European equities are in negative territory, while US futures are in the green.
The CME Fedwatch Tool is broadly backing a rate cut in September. The odds now stand at 89.9% for a 25-basis-point cut. A rate pause stands at a 5.7% chance, while a 50-basis-point rate cut has a very thin 4.4% possibility.
The US 10-year benchmark rate trades at 4.21% after trading higher at the Asian opening. Bond markets dipping lower on the possibility of Trump winning the US Presidential elections.

US Dollar Index Technical Analysis: Next President known

The US Dollar Index (DXY) is getting some support on the back of the events from this weekend. In the past, Trump’s presidency supported the Greenback. The big question, though, which is different this time against his previous term, is whether these spending packages are still supportive of a stronger and more expensive Dollar, seeing the possible deterioration of the US deficit and exponential rise in US debt.

The DXY is residing below all three major Simple Moving Averages (SMA) on Monday after its meltdown last week. The first barrier to regain control over is the 200-day SMA at 104.38. Next, the 100-day SMA resides near 104.81 while the declining 55-day SMA is trading at 105.07.

On the downside, the weak spot has been identified now at 103.99/104.00. Expect to see pressure mounting on that level with each test. Certainly, when the DXY bounces off that level each time, the bounces' highs would become smaller until the support gives way. A technical element to look out for could be that the 55-day SMA starts to break below the 100-day SMA and/or the 200-day SMA, risking a ‘death cross’ in technical terms, which is a catalyst for a substantially longer-term sell-off.

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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