US Dollar continues soft as markets await directions on fresh data

US Dollar, down 0.80% last week, now at lowest level since mid-June.
Anticipation builds with the upcoming release of the June inflation figures and Fed talks.
Market is pricing in less than 10% odds of a cut in July and around 80% in September.

The US Dollar continues to struggle amid signs of disinflation in the US economy, fostering confidence in a potential September rate cut from the Federal Reserve (Fed) among market participants. This week, Fed Chair Jerome Powell and other governors’ words might bail out the USD and limit the losses if they remain cautious.

Despite the trailing softness in the US indicators, Fed officials are still reluctant to embrace cuts, opting to remain data-dependent and might continue asking for patience.

Daily digest market movers: US Dollar continues soft ahead of CPI and Powell’s testimony

Among the most noteworthy events of the week are Chairman Powell's Semiannual Monetary Policy Report to Congress, multiple Fed members speaking, and the release of inflation data for June.
On Thursday, the headline Consumer Price Index (CPI) is expected to have dropped two ticks to 3.1% YoY, while the core figure is expected to remain steady at 3.4% YoY.
As for now, the market predicts less than a 10% chance of a rate cut at the July 31 meeting, with the odds shooting to around 80% for September.

DXY technical outlook: DXY's struggle persists as it resides below 20-day SMA

Following the DXY's slip below the 20-day Simple Moving Average (SMA) and shrinking by 0.80% last week, the technical outlook has shifted for the worst. Both the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) have slumped into negative territory.

Meanwhile, the 104.70 zone, marked by the 200-day SMA, continues to provide strong support. If the selling pressure continues, the 104.50 and 104.30 areas could potentially put a stop to further losses.

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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