US Dollar sees king Dollar under threat after Michigan Sentiment pulls back from yearly high

The US Dollar flattens on Friday as investors take profits after its rally on Thursday.
Traders are letting the dust settle on the lacklustre performance of the Euro after ECB’s dovish hike.
The US Dollar Index is above 105.00, though faces some profit taking ahead of the weekend.

The US Dollar (USD) faces broad profit taking on Friday after the Greenback had oil being poured on the fire from both sides. A dovish hike from the European Central Bank prompted traders to sell the Euro in the conviction the Eurozone economy will crash. Meanwhile, Retail Sales data out of the US and Producer Price Index numbers signalled that the US economy looks to head for that soft landing.

The Greenback is flirting with a ninth weekly close, though it will look like a close call in the last trading hours. The University of Michigan expectations sees inflation expectations dampening, which means that the Fed is seen done hiking. This means the rate dfiferential between Euro and the US Dollar will stay steady or get more narrow in the short term with the US Dollarindex possibly being under some pressure.

Daily digest: US Dollar losing its crown already?

Upticks across the board for the Import and Export prices: Import prices on the monthly basis went from 0.4% tot 0.5%. The yearly number from -4.4% tot -3.0%. Export Price numbers for the month went from 0.7% to 1.3%. The yearly index went from -7.9% to -5.5%. The shared element that is responsible for this uptick seems to be oil and energy prices.
In all the noise of both the Import and Export Price Indices, the New York Empire Manufacturing Index came out with a surprise beat from -19 to 1.9 where -10 was expected.
The Industrial Production went a touch lower in August from 0.7% tot 0.4%, where only 0.1% was expected.
Focal point for this Friday were the University of Michigan numbers. THe Sentiment index eased a touch to 67.7 from 69.5. It was rather the 5-year inflation forecast that went from 3.0% to 2.7%. Participants are seeing inflation to continue dip lower, which means the Fed does not need to hike anymore and thus King Dollar could lose its driving power.
Equities are taking a turn for the worse after the Michigan numbers with the Nasdaq plummeting over 1% on the back of those lower inflation expectations from the University of Michigan.
The CME Group FedWatch Tool shows that markets are pricing in a 97% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September after the recent PPI and Retail Sales numbers.
The benchmark 10-year US Treasury bond yield trades at 4.30%, substantially higher to where it was at the beginning of the week.

US Dollar Index technical analysis: King Dollar dented

The Greenback is facing increasing selling pressure as Dollar bulls take profit after the abating sentiment and lower inflation expectations from the University of Michigan survey. One element that boosted the US Dollar on Thursday was the macroeconomic front, with the solid US Retail Sales data, lower Jobless Claims both initial and continuing, and PPI numbers confirming the Fed is on the right track. The second jetpack came from the depreciating Euro, which got hammered after a European Central Bank meeting where Lagarde refrained to answer several simple questions, leaving traders behind with not much belief or elements to support the Euro.

The US Dollar Index (DXY) has edged up, reaching as high as 105.41. This is just a sigh away from the 2023 high near 105.88. Should the DXY be able to close above there for the week, expect King Dollar to go even stronger in the medium-turn.

On the downside, the 104.44 level seen on August 25 kept the Index supported on Monday, not allowing the DXY to sell off any further.. Should the uptick that started on Tuesday reverse and 104.44 gives way, a substantial downturn could take place to 103.04, where the 200-day 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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