US Dollar in the green, recovering partial losses from CPI massacre

The Greenback dropped over 1.5% on Tuesday, its worst performance in over a year.
Traders are seeing the US Dollar getting stronger again on the back of stronger Retail Sales data.
The US Dollar Index tries to recover some losses and stays afloat above 104.

The US Dollar (USD) is trading into a new reality on Wednesday while it tries to regain confidence by at least trying to recover some losses. Lower-than-expected Consumer Price Index (CPI) numbers for October led to a tectonic shift in all asset classes of financial markets: equities jumped, commodities rallied, bonds surged and in the forex market the Scandinavian and Central-Eastern European (CEE) currencies were the biggest winners on the back of a losing Greenback.

The calendar for this Wednesday played out as expected: expectations were too high after the positive weaker CPI number. An uptick in Retail Sales and PPI numbers keeping their pace are no adding more fuel to the repositioning of Tuesday. The US Dollar Index (DXY) is expected to claw back further now, while traders brace for any headlines from San Francisco, where US President Joe Biden will meet with ChinesePresident Xi Jinping.

Daily digest: US Dollar at session's high

The US budget deadline is due to kick in on November 17. Sentiment was further boosted on Tuesday by growing hopes that a Us government shutdown would be avoided.
US President Joe Biden is set to meet Chinese President Xi Jinping at the historic Filoli estate south of San Francisco on Wednesday.
Wednesday’s calendar has kicked off with the print of the Mortgage Bankers Association (MBA)’s weekly mortgage applications which rose by 2.8% last week.
Around 13:30 GMT, the New York Empire State Manufacturing Index for November was released. a firm beat of expectations from -4.6 to 9.1.
A big batch of data was released at 13:30 GMT:
- The Producer Price Index (PPI):
  1. The monthly headline PPI went from 0.4% to -0.5%.
  2. The monthly Core PPI went from 0.2% to 0.0%.
  3. The yearly headline PPI went from 2.2% to 1.3%.
  4. The yearly Core PPI went from 2.7% to 2.4%.
- US Retail Sales figures:
  1. The monthly figure for October went from an upward revised 0.9% to -0.1%.
  2. The Retail Sales Control Group number went from 0.7% to 0.2%.
Business Inventories for September came in unchanged at 0.4%.
Equities are taking over the enthusiasm from Tuesday. The Hang Seng is the biggest winner, up over 3%. In Europe, all important European indices are near 1% in the green, while US equities futures only mildly up.
The CME Group’s FedWatch Tool shows that markets are pricing in a 94.5% chance, up from 85.7% on Tuesday morning, that the Federal Reserve will keep interest rates unchanged at its meeting in December.
The benchmark 10-year US Treasury yield trades at 4.54%, which is a substantial move lower from the 4.64% on Monday.

US Dollar Index technical analysis: US Dollar still standing

The US Dollar had its worst intraday performance in over 52 weeks, with a devaluation of more than 1.50% in the US Dollar Index (DXY). Nonetheless, traders need to watch out as the Greenback could put up a fight. Hopes for even more fading inflation are high ahead of the Producer Price Index (PPI) data, so the odds are in favor of the Greenback to at least erase some losses from Tuesday in the DXY.

The DXY is being stopped around the 100-day Simple Moving Average (SMA) near 104.15. Expect to see a bounce from there with 105.29, the low of November 6, as the market where the DXY should try to close above for this week. From there, the 55-day SMA at 105.71 is the next market on the topside that needs to be reclaimed by US Dollar bulls before starting to think of more US Dollar strength to come into play.

Traders were warned that when the US Dollar Index would slide below that 55-day SMA, a big air pocket was opening up that could see the DXY fall substantially, and did materialise on Tuesday. For now the 100-day SMA tries to hold, though at 103.61, the 200-day SMA is a much better candidate to look for support. Should that level even be broken substantially, a long term sell-off could get underway with the DXY falling between 101 and100.

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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