- The US Dollar has a change of heart and turns red this Wednesday.
- A very light economic calendar is ahead for Wednesday.
- The US Dollar Index retreats further below 103.00 while Risk Off sweps the equity markets.
The US Dollar (USD) is turning red now that the dust has fully settled over the US Consumer Price Index (CPI) data that came in slightly higher than expected, casting doubts over the timing of interest-rate cuts by the Federal Reserve (Fed). After an initial positive move following the release of the CPI data, the Greenback gave up half of its gains on Tuesday as US equities rallied. On Wednesday the DXY US Dollar Index is standing firm and looks set to close above 103.00 if no hiccups occur into the US trading session.
On the economic data front, a very light calendar is ahead, with nothing worth mentioning. A rather political element to mention is that the Primaries on Tuesday gave both current US President Joe Biden and former US President Donald Trump enough votes to secure their presidential nominations. November 5 will thus be a rematch from four years ago.
Daily digest market movers: A down day
- Industrial Production numbers out of Europe are sinking further into contraction, with Germany turning once again the weak patient of Europe.
- Russian President Vladimir Putin has confirmed that once Finland has joined NATO, it will enforce troops all along the Finnish/Russian boarder.
- Current US President Joe Biden and former US President Donald Trump both secured enough votes on Tuesday to deserve their nomination for their respective parties and are heading to November 5 for the Presidential election.
- Austrian Central Bank Governor Robert Holzmann said on Tuesday that should the European Central Bank (ECB) cut interest rates ahead of the Fed, that would mean substantial risk of an over-devalued Euro, which in its turn, could respark inflation again.
- At 11:00 GMT, the weekly Mortgage Applications number was released. Another jump by 7.1% against the 9.7% from last week was the actual number.
- The US Treasury is set to allocate a 30-year Bond Auction at 17:00 GMT.
- US equities are sinking with the Nasdaq down near 1%, dragging both the Dow Jones and the S&P500 along.
- According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the March 20 meeting are at 99%, while chances of a rate cut stand at 1%.
- The benchmark 10-year US Treasury Note trades around 4.18%, broadly higher for the week.
US Dollar Index Technical Analysis: Risk of more downturn
The US Dollar Index (DXY) might be posting a third day in the green this week, but traders will not be applauding the move after seeing that the CPI print was rather unable to really move the needle for the DXY. With a firm rejection even ahead of the 55-day Simple Moving Average (SMA), the question now is what will fuel the US Dollar for a multiple-day rally seeing several economic indicators abate further.
On the upside, the first reclaiming ground is at 103.34, the 55-day SMA, and at the 200-day SMA near 103.71. Once broken through, the 100-day SMA is popping up at 103.72, so a bit of a double cap in that region. Depending on the catalyst that pushes the DXY upwards, 104.96 remains the key level on the topside.
The DXY was unable to even test or challenge the 55-day SMA after the CPI print. More downside looks inevitable with 102.00 up next, which bears some pivotal relevance. Once through there, the road is open for another leg lower to 100.61, the low of 2023.
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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