US Dollar steady as this week will be one of the most intense on both macro and geopolitical front

The Greenback flipflopping in red and green throughout Monday trading.
Traders will keep their powder dry for Tuesday and Wednesday as focal points this week.
The US Dollar Index is expected not to make any big moves with a light Monday calendar.

The US Dollar (USD) is flat in this very calm Monday with the Australian Dollar (AUD/USD) and the Swedish Krona (USD/SEK) as outliers gaining against the Greenback. Markets experience a very calm start to the week with traders keeping their powder dry as this Monday holds no important data events whatsoever when it comes to the US macroeconomic agenda. Traders rather will try to assess and preposition towards Tuesday and Wednesday's data releases.

On the economic data front traders will be using this Monday's empty docket to assess the uptick in Friday’s University of Michigan expectations regarding the inflation outlook, and assess if the US Consumer Price Index on Wednesday and the Producer Price Index on Thursday will already reflect that assumption of an uptick in inflationary pressures. Seeing from the very choppy and nervous price action on Friday on the back of the Michigan numbers, traders are best to brace for a very nervous and volatile week in the Greenback and in the US Dollar Index.

Daily digest: US Dollar faces risk from all angels

On the geopolitical front all eyes on the meeting between Chinese President Xi Jinping and US president Joe Biden on Wednesday in San Francisco
US Government shutdown headlines are picking up again, and are triggering some safe haven inflow into the Greenback.
China is weighing unfreezing Boeing 737 orders.
European Central Bank Vice-President Luis de Guindos issues says he expects a temporary inflation rebound in the coming months. This falls in line with what US Federal Reserve Chairman Jerome Powell said last week.
Reserve Bank of Australia Assistant Governor (Economic) Marion Kohler said that more hikes could be needed in Australia as the RBA rates are not restrictive enough.
The Pentagon has confirmed that over the weekend it has hit Iran-linked targets in Syria.
Equities are still awakening this Monday with the Japanese Topix and Nikkei closing flat. In China the Hang Seng is soaring over 1%, while European equities are slightly in the green. US equities are falling out of bed this Monday and are in the red less than 1%.
The CME Group’s FedWatch Tool shows that markets are pricing in a 91.2% chance that the Federal Reserve will keep interest rates unchanged at its meeting in December.
The benchmark 10-year US Treasury yield trades at 4.66%, and is slowly making its way up again.

US Dollar Index technical analysis: US Dollar to enter volatility patch

The US Dollar entered a nervous patch on Friday on the back of the University of Michigan inflation expectations survey showed an uptick in inflation expectations. The data confirmed what Fed Chairman Powell was warning about in his most recent statement last week. If the Fed is right and a rise in inflation is noticed this week in both the Consumer Price Index and Producer Price Index numbers, markets might need to factor in another rate hike, which means some more US Dollar strength to come into the DXY.

The DXY was looking for support near 105.00, and was able to bounce ahead of it earlier last week. Any shock events in global markets could spark a sudden turnaround and favour safe-haven flows into the US Dollar. A rebound first to 105.85 would make sense, a pivotal level from March 2023. A break above could mean a revisit to near 107.00 and recent peaks printed there.

On the downside, 105.10 is still acting as a line in the sand. Once the DXY slides back below that, a big air pocket is opening up with only 104.00 as the first big level, where the 100-day Simple Moving Average (SMA) can bring some support. Just beneath that, near 103.50, the 200-day SMA should provide similar underpinning.

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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