- Strong Initial Jobless Claims data triggered the USD boom, yet aggressive easing might limit the upside.
- Investors await further clues on the US economy.
- Markets continue to underestimate the Fed and are confident that it will rush to cut.
The US Dollar (USD), measured by the US Dollar Index (DXY), held steady at around 103.00 on Thursday after a two-day rebound. Strong Initial Jobless Claims data for the week ending August 3 is helping the USD to gain traction as the market awaits deeper insights into the US economy.
Taking into account all data, the overall US economic outlook remains positive, with growth still tracking above trend. This suggests that the market may be overvaluing aggressive easing once again, as it did at the start of the week.
Daily digest market movers: USD gains from strong Initial Jobless Claims surrounding wait-and-see sentiment
- On the data front, US citizens applying for unemployment insurance benefits rose by 233K, below the initial consensus of 240K and lower than the previous week's gains of 250K (revised from 249K).
- Market sentiment dipped after the weak 10-year US Treasury auction on Thursday morning, affecting global equity markets today. Despite a moderately dovish BOJ summary, markets are still cautious.
- Volatility across all markets is expected to remain high into next week when top-tier US data should provide a clearer picture of the US economy.
- The market is still pricing in 100 bps of easing by year-end, with a 40% chance that an additional 25 bps will be added. The first cut in September is expected to be around 50 bps.
DXY technical outlook: Indicators improve but remain in red, maintaining a bearish bias
Despite the technical outlook showing improvements, the indicators remain in the red. The Relative Strength Index (RSI) is still below 50, and the Moving Average Convergence Divergence (MACD) is hitting lower red bars.
As the week unfolds, supports stand at 103.00, 102.50 and 102.20 with resistances at 103.50 and 104.00. A break above this last resistance will improve the outlook, and buyers will have gained the 20-day Simple Moving Average (SMA).
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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