US Dollar slides lower with traders on edge for FOMC Minutes, US CPI print

The Greenback is losing steam against most major peers for this week.
All PPI components were a beat on estimates and had upward revisions from previous numbers.
The US Dollar Index trades below 106 and could result in more losses with the longer-term rally ending overnight.

The US Dollar (USD) is a sinking ship as US bond yields plunge ahead of publication of the FOMC Minutes and CPI numbers Thursday, looking beyond recent developments in Israel and Gaza. It appears that several countries and participants around this war do not want to see further escalation of violence. This means, for now, a proxy war is out of the way. Safe havens are starting to abate with the Swiss Franc and the Greenback retreating to weaker levels.

Meanwhile, traders have used the brief moment of US Dollar strength on Monday to sell the US Dollar, steering it substantially lower throughout Tuesday, after comments from several Federal Reserve officials signaled the Fed is done hiking. The recent Producer Price Index (PPI) numbers from this Wednesday are setting the tone for the upcoming Consumer Price Index (CPI) data on Thursday, markets will now look for clues if the Greenback needs to be devalued even more and might see the US Dollar Index (DXY) print more losses later this week.

Daily digest: US Dollar sinks

At 11:00 GMT, the Mortgage Bankers Association (MBA) has issued its weekly Mortgage Applications Index. Previous number was at -6% week-on-week, with for last week a rise of 0.6%.
The main event for Wednesday was an upbeat surprise and upward revision across the board for the Producer Price Index numbers. For the monthly gauge, expectations were for it to head from 0.7% to 0.4%, instead it went to 0.5%. The yearly number got revised up from 1.6% to 2% for the August number while the new September number came in at 2.2%. The monthly Core PPI, without Food and Energy,which was expected to stay stable at 0.2%, soared to 0.3%. The yearly Core PPI got revised from 2.2% to 2.5% for August while September's number went to 2.7%.
Christopher Waller from the Board of Governors at the Fed is due to speak at 14:15 GMT. Raphael Bostic from the Atlanta Fed will be taking the stage near 16:15 GMT.
The US Treasury is looking for some funding in the market. This time the 10-year note is up for auction at 17:00 GMT.
Traders can look for clues or confirmation on the possible end of rate hikes with the Fed’s latest FOMC minutes due at 18:00 GMT.
Equities are a bit mixed with Asian stocks up and European stocks down. That last one is not a big surprise after the substantial surge European equities had on Tuesday. It must be some small profit-taking action there. US equity futures are flat and hold on to Tuesday’s gains.
The CME Group FedWatch Tool shows that markets are pricing in an 84.3% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
The benchmark 10-year US Treasury yield trades at 4.60%, which is a fresh weekly low.

US Dollar Index technical analysis: All eyes on FOMC Minutes

The US Dollar snapped a very important trendline on the US Dollar Index chart. This is true for both the weekly and the daily time frames. The Indian summer rally that started in July and extended all the way up to last week came to an end with the DXY breaking below the respected trendline from throughout that period. From a pure technical point of view, this means some US Dollar weakness will further take place before initial support is met.

The DXY opens below 106, which means that that will be the first initial hurdle to recapture. On the topside, 107.19 is important to see if the DXY can get a daily close above that level. If this is the case, 109.30 is the next level to watch.

On the downside, the recent resistance at 105.88 did not do a good job supporting any downturn. Instead, look for 105.12 to keep the DXY above 105.00. If that does not do the trick, 104.33 will be the best level to look for some resurgence in US Dollar strength with the 55-day Simple Moving Average (SMA) as a support level.

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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