US Dollar slaughters Euro, EUR/USD at a six-month low

The US Dollar trades higher on Monday as US government shutdown risk escalates.
In the background traders will be on edge for US GDP numbers later this week.
The US Dollar Index resides near the six-month highs.

The US Dollar (USD) made clear why it deserved its status as king after a quite volatile week. The US Federal Reserve could not have been more clear and confirmed yet again that rates in the US will stay higher for longer. This puts the US Dollar as the strongest partner in most trading pairs due to interest rate differentials.

Amidst all the noise on the macroeconomic front, traders did not really care about the US government shutdown until this coming Friday evening. When House Speaker Kevin McCarthy sent all Representatives packing for the weekend last Friday, traders became aware that a deal might again not happen until the final hour. This means some risk premium, on the back of a weaker US Dollar, might emerge as days pass without any hopeful signals from Capitol Hill on a possible deal.

Daily digest: US Dollar jumps higher

US House Speaker Kevin McCarthy says he can bring a deal to the floor by Tuesday in order to avoid a US Government shutdown.
A very calm start of the week has begun with the Chicago Fed National Activity Index for August, which went from 0.12 to -0.16. A small contraction, together with the previous number revised down to 0.07.
The US Dallas Fed Manufacturing Business Index for August is expected to come out near 14:30 GMT and was in contraction at -17.2 for July.
The US Treasury will be auctioning 3-month and 6-month bills at 15:30 GMT at elevated rates.
A big dispersion in the equity markets shows its face at the start of the week in Asia: Japanese stocks rally with both the Topix and the Nikkei in the green. China, meanwhile, sees Hong Kong’s Hang Seng Index tank near 1.5% as Evergrande cancelled a meeting with creditors to renegotiate terms. European equities are sinking lower with the German Dax down 1%. US futures are in the red, though could recover near the US opening bell.
The CME Group FedWatch Tool shows that markets are pricing in a 77% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November. The recent turmoil on Capitol Hill and the United Auto Workers (UAW) strike could force the Fed to keep rates unchanged through the end of the year.
The benchmark 10-year US Treasury shoots higher to hit 4.5089% with the US opening bell just around the corner, making a new multi-year high.

US Dollar Index technical analysis: above 106

The US Dollar moves the needle again this week and breaks above 106 as the rate differential still plays a key defining factor. On the other side, the automaker strike in Detroit and possible US government shutdown could weigh on the Greenback over the short term. The US Dollar Index (DXY) is looking for direction in this difficult environment.

The US Dollar Index opens up above 105.50 this Monday and shows small signs of possibly going higher. Should the DXY close above the yearly high near 105.88, expect the US Dollar to follow on with more bullish moves in the medium term. US yields and the unwinding of the US strike and government shutdown will remain crucial to support current levels in the DXY.

On the downside, the 104.44 level seen on August 25 kept the Index supported on Monday, halting the DXY from selling off any further. Should the uptick that started on September 12 reverse and 104.44 give way, a substantial downturn could take place to 103.04, where the 200-day Simple Moving Average (SMA) comes into play for support.

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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