US Dollar saw red on Friday, secured a weekly gain

DXY Index demonstrates slight losses yet sustains near early November highs.
The downward movements may be seen as buyers running out of momentum.
Hawkish bets on the Fed and a sour market mood may limit the losses.

The US Dollar Index (DXY) is currently trading at 106.09, a mild loss from its recent peak of 106.35. Despite this, the index remains geared toward testing its November 1 high of 107.10. However, the outlook for the Greenback remains positive as Middle East tensions and hawkish bets on the Federal Reserve (Fed) may drive demand back to the USD.

The US economy exhibits robust growth with persistent inflation, which made the Fed change its messaging to a more hawkish one, triggering a rally of US Treasury yields and hence benefiting the US Dollar.

Daily digest market movers: DXY slightly corrects, while outlook remains positive

Higher Middle East tensions cultivate risk-off sentiment, affecting global markets.
Fundamentals and hawkish Federal Reserve (Fed) rhetoric ensure the US Dollar's uptrend continues.
For the next Fed meeting, signs show some officials considering rate hikes, a major departure from the previous intentions of rate cuts. This could significantly impact markets if market pricing realigns itself to this new direction.
In the US Treasury bond market, the 2-year, 5-year, and 10-year bond yields are all falling. Specifically, the 2-year yield trades at 4.97%, the 5-year at 4.65%, and the 10-year at 4.60%, but all remain near multi-month highs.
The first rate cut is now expected to hurdle past the May, June, and July meetings to appear in September.

DXY technical analysis: DXY showing bearish momentum, but bulls are still in the game

On the daily chart, The Relative Strength Index (RSI) operates in positive territory but exhibits a negative slope, implying that a move down is possible and reflects bearish momentum. Concurrently, the Moving Average Convergence Divergence (MACD) underscores this sentiment as the decreasing green bars suggest an imminent bearish crossover, highlighting ongoing selling momentum.

However, despite short-term downward pressures, the bulls have not yet thrown in the towel. This is substantiated by the DXY's position above the 20, 100, and 200-day Simple Moving Averages (SMAs), which indicates that bulls still have control over the overall trend.

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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