US Dollar keeps pressing higher as Capitol Hill fails to avert shutdown

The US Dollar broke higher on Tuesday in late US trading hours as reports from Capitol Hill pointed to no resolution in sight.
Durable Goods Orders came in as an upbeat surprise on all fronts.
The US Dollar Index reaches a new 10-month high above 106.63.

The US Dollar (USD) keeps printing new highs at a fast pace this Wednesday, with the main driver this week being the stalemate on Capitol Hill. Both the Senate and the House are pushing bills to the floor, proposals that on its own are not enough to avert a shutdown by October 1. As the deadline looms, it becomes more likely that by Saturday the US government will be shut down and markets could be left in the dark on where the US is in terms of macroeconomic conditions, as an extended halt would mean that many agencies stop publishing economic data.

The main event for Wednesday was the Durable Goods segment where overal Durable Goods Orders for August came in at 0.2% versus -5.6% previous month. When excluding transportation, rose even more from 0.1% to 0.4%, showing a still resilient consumer in the US. The US Energy Information Administration (EIA) will also publish its US crude stockpile numbers as the current Cushing stockpile reserve is at the lowest level in a decade. The numbers might trigger another leg higher in Oil prices.

Daily digest: US Dollar higher on split Capitol Hill

The Mortgage Bankers Association (MBA) was issued at 11:00 GMT its Mortgage Applications number for last week. Applications declined from 5.4% to - 1.3%.
Durable Goods were a beat on expectations, in a positive sense: Overall Durable Goods for August came out at 0.2%, jumping back positive from previous -5.4%. Durable Goods without Transportation rose as well to 0.4% from 0.1% previous.
The highly anticipated EIA US crude stockpile report is due at 14:30. Next to the crude stockpile change, the current Cushing reserves will be a market driving factor for Oil prices.
The US Treasury is expected to hit the markets with a 5-year bond auction at 17:00.
Equities are all in the green across the board, from Asia to the US futures. Markets are trying to shrug off the negative gloom from the past few days.
The CME Group FedWatch Tool shows that markets are pricing in an 80.4 % chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
The benchmark 10-year US Treasury yield traded as high as 4.51% and takes a small step back from Monday’s peak as investors start to buy safe bonds as a shield for any possible US government shutdown.

US Dollar Index technical analysis: Shutdown inevitable

The US Dollar keeps printing new 10-month highs on a daily basis this week with several main drivers making the Greenback a safe haven. Not only is the possible US government shutdown a nearby factor, the current interest-rate differential and hawkish comments from several US Federal Reserve members makes it clear to markets that policy won’t change anytime soon. This validates the US Dollar Index (DXY) from creeping higher on track for a new 52-week high.

The US Dollar Index opens above 106.00, though the overheated RSI might make it difficult to hold this level. Traders that want to hit a new 52-week high need to be aware that a lot of road needs to be covered towards 114.78. Rather look for 107.19, the high of November 30, 2022, as the next profit target on the upside.

On the downside, the recent resistance at 105.88 should be seen as first support. Still, it has just been broken to the upside, so it isn’t likely to be a strong barrier. Rather look for 105.12 to do the trick and keep the DXY above 105.00.

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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