US Dollar declines after weak data, Fed battles against dovish bets

DXY gave up some ground and fell to 100.60.
Conference Board consumer confidence data for September missed expectations.
Fed speakers are battling the current market’s dovish expectations.

The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, posted some losses on Tuesday after the release of the Conference Board’s Consumer Confidence data. In the meantime, Federal Reserve (Fed) officials seem to be trying to push back on the market’s aggressive dovish bets.

The US economy exhibits mixed signals with indications of both a slowdown and ongoing resilience. Economic activity appears to be moderating, but some sectors remain strong. The Fed has indicated that the trajectory of its monetary policy will be guided by the evolving economic data, suggesting that the pace of rate adjustments will depend on the incoming information.

Daily digest market movers: US Dollar declines after CB Consumer Confidence surprise, Fed speakers

US Consumer Confidence unexpectedly plunged in September, falling below expectations to 98.7.
Market anticipates excessive Fed easing, pricing in 75 bps of cuts by year-end and 175-200 bps over the next year.
Some Fed officials, including Neel Kashkari from the Federal Reserve Bank of Minneapolis and Michelle Bowman, are pushing back against dovish market expectations.
Bowman dissented from the recent 50 bps rate cut, preferring a 25 bps reduction and warning that a larger cut might hinder the inflation fight.
She highlighted ongoing inflation risks, including supply chain disruptions and fiscal policy, and remains cautious about the strength of the labor market.
Other Fed officials, like Raphael Bostic from the Federal Reserve Bank of Atlanta and Austan Goolsbee from the Federal Reserve Bank of Chicago, express concerns about the labor market and support faster rate cuts.
Markets continue to bet strongly on 75 bps of easing this year.
On the positive side for the USD, divergence in global growth favors the US Dollar, with the eurozone, Australia and China showing signs of weakness.
US 10-year benchmark rate retreated from September highs, currently trading at 3.75%.

DXY technical outlook: DXY holds bearish momentum, bulls struggle

Technical analysis for the DXY index reveals a bearish trend, supported by the Relative Strength Index (RSI) at around 40 and the Moving Average Convergence Divergence (MACD) printing decreasing green bars. With the index below the 20,100 and 200-day Simple Moving Averages (SMA), the technical outlook remains clearly bearish. A break above the 20-day SMA would improve the outlook somewhat

Support levels exist at 100.50, 100.30 and 100.00, while resistance levels are at 101.00, 101.30 and 101.60.

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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