- The US Dollar sees Fed's Bowman providing small support.
- The US calendar starts slowely with Chicago PMIs and the Dallas Fed Manufacturing survey.
- The US Dollar Index keeps hovering near the 2024 low in search of substantial support.
The US Dollar (USD) trades broadly flat after Federal Reserve Governor Michelle Bowman pointed to inflation which is still "uncomfortably above" the 2% target, according to the Fed governor. This ahead of a busy week that will end with the key Nonfarm Payrolls data. The main theme surrounding the jobs data will be how much the US Federal Reserve (Fed) will cut rates in its November meeting.
On Monday’s economic calendar, the Chicago Purchasing Managers Index (PMI) for September is due to be released, followed by the Dallas Fed Manufacturing Business Index for September. With both indices in contraction territory, it will be interesting to see how they will move before US Federal Reserve Chairman Jerome Powell takes the stage around 17:00 GMT.
Daily digest market movers: Will Powell follow Bowman?
- Monday will start with already two quite important data releases. The first one is the The Chicago Purchasing Managers Index for September, to be published at 13:45 GMT. The expectation is for a number still in contraction at 46.5, a bit better than the 46.1 in August.
- At 14:30 GMT, the Dallas Fed Manufacturing Business Index for September is foreseen to be released. Expectations are similar to the ones for the Chicago PMI, with analysts anticipating the index to remain in contraction at -4.5 but improving from the previous -9.7.
- Two Fed speakers this Monday to look out for:
- Federal Reserve Governor Michelle Bowman dhas elivered a speech about the US economic outlook and monetary policy at the Bankers Association President/CEO Conference in Charleston, South Carolina. She said that Core Inflation is still very "uncomfortably above" the 2% target, Bloomberg reported.
- Around 17:00 GMT, Federal Reserve Chairman Jerome Powell delivers a speech about the US economic outlook at the 66th National Association for Business Economics annual meeting in Nashville, Tennessee.
- While the Shanghai Shenzhen CSI 300 composite index closed up over 8%, European and US equities are doing far worse with red numbers across the board.
- The CME Fedwatch Tool shows a 60.4% chance of a 25 basis-point rate cut at the next Fed meeting on November 7, while 39.6% is pricing in another 50-basis-point rate cut.
- The US 10-year benchmark rate trades at 3.76%, looking to test the three-week high at 3.81%
US Dollar Index Technical Analysis: Either it breaks or it bounces
The US Dollar Index (DXY) is unable to move away from that fresh yearly low at 100.16. The biggest issue is that there are no technical levels to trade on. Either venturous traders will get in and could push the DXY back higher or they will wait for the next pivotal support sub-100.00 at 99.58.
A reshuffle of resistance levels is needed at the start of this week. With three daily closes below 100.62, this level is now considered a firm resistance. In case Dollar bulls can turn things around, look at 101.90 for the second resistance level on the upside. Just above there, the 55-day Simple Moving Average (SMA) at 102.22 will come in.
Time to make our homework as well for more downside. The fresh low of 2024 is at 100.16, so a test will take place before more downside takes place. Further down, and that means giving up the big 100.00 level, the July 14, 2023, low at 99.58 comes into play.
US Dollar Index: Daily Chart
Central banks FAQs
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%.
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.
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%.
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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