US Dollar recovers some ground as Powell continues asking for patience

US Dollar regained some ground afterJerome Powell's comments.
Market retains confidence in a September rate cut.
Investors await June’s CPI snapshot of US inflation on Thursday.

The US Dollar staged a minor comeback and the DXY rose to 105.20, courtesy of Federal Reserve (Fed) Chairman Jerome Powell's recent congressional comments, which shied away from embracing rate cuts in the immediate future, advocating for patience instead.

Tinged with disinflation indicators, the US economic outlook has raised hopes of a September rate cut. That said, Fed officials are in no rush to implement cuts, choosing instead to rely on data-centric indicators before making such decisions.

Daily digest market movers: DXY up as markets assess Powell’s words

Fed Chair Jerome Powell's Semiannual Monetary Policy Report to Congress and his testimony before the Senate Banking Committee are the standout events on Tuesday.
Powell re-emphasized the need for encouraging economic data to shore up the Fed's confidence in managing inflation effectively.
He underscored that it is not only high inflation that poses a risk but is apprehensive about announcing a rate cut until there is assured evidence that inflation is consistently gravitating toward the 2% target.
However, he stressed the importance of meeting-by-meeting policy decisions, admitting that while progress has been made toward the 2% inflation goal, the recent data needs to be more encouraging to warrant a rate cut.
US Consumer Price Index (CPI) arrives on Thursday and will be closely watched by market participants.
YoY CPI headline inflation is forecasted to decelerate by two points to 3.1%, and the core reading is expected to hold steady at 3.4%.
As per the CME FedWatch Tool, the probability of a rate cut in July remains below 10% but at approximately 80% for September.

DXY technical outlook: Recovery seems possible as DXY stays above 100-day SMA

While technically speaking the DXY experienced a downturn, losing 0.80% in value and slipping below its 20-day Simple Moving Average (SMA) last week, some recovery is now detected above the 100-day SMA. Both the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicators have retreated into negative territory but are presenting better and gained momentum on Tuesday.

Nevertheless, the 104.78 zone, denoted by the 100-day SMA, has held strong, repelling sellers and thereby reestablishing support. Below there, the 104.50 and 104.30 zones could potentially act as robust backstops against further declines.

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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