US Dollar jumps ahead of Powell speech as ISM improves

The Greenback trades a touch softer after its firm move up on Thursday.
US traders are set to hear from US Fed Chairman Powell ahead of the blackout period.
The US Dollar Index is steady above 103 and just a sigh away from ending the week in the green.

The US Dollar (USD) is on a crossroad where it can either close the week in the green or in the red. The US Dollar Index (DXY) has made a staggering recovery on Thursday and was back at its opening price from Monday. The main driver is the rate differential between the US and the rest of the world. This got a bit bigger again after the recent plunge in US rates. These too recovered this week.

On the economic front, two main elements could still add some US Dollar strength to this week's move. The first is a speech from US Federal Reserve Chairman Jerome Powell right at the end of this trading day. The second element zhich came from the Institute of Supply Management saw Prices Paid soaring and other components performing better than previous month.

Daily digest: ISM recovers

Around 14:45 GMT the S&P Global Purchase Manufacturing Index (PMI) for Manufacturing. Previous was at 49.4, a stand still as expected.
Near 15:00 GMT this week’s last batch of data was released:
1. Construstruction Spending for the month soared from 0.2% to 0.6%.
2. The Institute for Supply Management (ISM) released its figures with the Employment Index for November: small contraction from 46.8 to 45.8.
3. ISM Manufacturing New Orders Index went from 45.5 to 48.3.
4. ISM Manufacturing PMI remained unchanged at 46.7.
5. ISM Manufacturing Prices Paid soared from 45.1 to 49.9.
Fed speakers this Friday as it is the last moment before the blackout period ahead of the last Fed rate decision for 2023.
1. Austan Goolsbee from the Chicago Fed is due to speak nar 15:00 GMT.
2. Fed Chairman Jerome Powell is due to speak nar 16:00 GMT.
3. Chairman Powell will speak again at 19:00 GMT.
4. Lastly Lisa Cook from the Fed’s board of governors will speak as well around 19:00 GMT.
Right at the end of this Thursday, the US Treasury is heading to markets to allocate a 4-week bill.
Equities are sliding lower with the Hang Seng having a very bad week this week: again down over 1%. European indices are in the green while US futures are starting to turn red.
The CME Group’s FedWatch Tool shows that markets are pricing in a 99.4% chance that the Federal Reserve will keep interest rates unchanged at its meeting in December.
The benchmark 10-year US Treasury Note trades at 4.33%, and steady off this week’s low.

US Dollar Index technical analysis: Risk of falls break

The US Dollar is holding good cards here to take the upper hand this week and end its losing streak. US Fed Chairman Jerome Powell will need to choose if he backs the dovish comments from Fed’s Governor Christopher Waller, or sticks with the steady-for-longer view from San Francisco Fed’s Mary Daly. The latter could be enough to shoot the US Dollar Index (DXY) back above 104.

The DXY is making its way up towards the 200-day Simple Moving Average (SMA), which is near 103.58. The DXY could still make it through there, should Powell comments be enough for another push higher. A two-tiered pattern of a daily close lower followed by an opening higher would quickly see the DXY back above 104.28, with the 200-day and 100-day SMA turned over to support levels.

To the downside, historic levels from August are coming into play, when the Greenback summer rally took place. The lows of June make sense to look for some support, near 101.92, just below 102. Should more events take place that initiate further declines in US rates, expect to see a near full unwind of the 2023 summer rally, heading to 100.82, followed by 100.00 and 99.41.

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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