US Dollar to perform its worst week in over a year

US Dollar is near several multi-month and yearly lows against major currencies.
The expect Producer Prixe Index print did not trigger another round of selloffs.
The US Dollar Index said goodbye to 101.00 and is now pulled toward 100.00.

The US Dollar (USD) briefly got a lifeline from the US jobless print which got published at the same time as the Producer Price Index, though it was a mere drop on a hot plate. It was very hard to look for any green print on Wednesday or this morning as the Greenback lost substantial ground against all G10 currencies with notable losses against the Japanese Yen extending over 1%. On Thursday, the US Dollar was down nearly 1% against the Australian Dollar (AUD/USD) and the New Zealand Dollar (NZD/USD). The US Dollar Index (DXY) has been unable to catch a breath and is again on the back foot nearing the all important 100.00 line in the sand.

The Greenback had to wait thus until the economic number print this Thursday at 12:30 GMT that finally offered some counterweight against the relentless selling that unfolded on the Consumer Price Index (CPI) print on Wednesday. It was not the Producer Price Index though that saved the day for the US Dollar Index (DXY), but the US jobless print with the initial claims coming in lower as expected. This is of course not enough for a sudden turnaround in the US Dollar performance, yet enough to get some air after its steep decline.

Daily digest: US Dollar turns ungly again as Europe closes

As the European sessions comes to an end, the US dollar ekes out more losses in several pairs and sees the US Dollar index dropping back to session's low.
US Producer Price Index overall on a yearly basis dropped from 1.1% to 0.1%, the core went from 2.8% to 2.4%. THe monthly performance overall went from -0.3% to 0.1% and the core from 0.2% to 0.1%.
US jobless claims saw the initial claims drop to 237,000 after coming from an upward revised 249,000. The continuing claims rose slightly from 1,718,000 to 1,729,000. The call from US senator Elisabeth Warren to "stop the madness' towards the Fed and its hiking cycle onWednesday will get less support as the job market is still behaving quite good in this higher rate environment.
US Dollar Index futures contracts for September (DXU3) have breached the psychological 100.00 level during intraday trading.
The International Energy Agency (IEA) cuts its global oil demand outlook for 2023 as it sees the global economy slowing substantially in the last quarter of this year.
Chinese trade exports shrunk from -7.5% to even -12.4% for June as the nation is losing its title as biggest exporter of the world.
The US Treasury is set to access the markets as well in order to allocate a 30-year bond auction, which will be interesting to see with these fast declining yields.
Equities across the globe saw a big push into risk assets as the safe haven Greenback retreated. Japans’ Topix index rose 1% at its closing bell, while the Chinese Hang Seng is up over 2.50%. European equities are mildly halfway through European trading while US equity futures are pointing to a nice 0.50% opening overall. Nasdaq 100 futures even rise to a 52-week high.
The CME Group FedWatch Tool shows that markets are stuck at 92.4% chance of a 25 basis points (bps) interest-rate hike on July 26. Chances of a second hike in November have dropped from 26.7% on Wednesday to 19.1%. It appears that markets are fully disregarding the remarks from the Fed on two more hikes, and presume that the Fed will hike in July for the last time. Markets expect US Fed Chairman Jerome Powell to announce that the pivotal level has been reached at the yearly Jackson-Hole Symposium between August 24 and 26.
The benchmark 10-year US Treasury bond yield trades at 3.81% and is continuing its slide lower from 4.09% last week. Traders have gone all-in and are calling the bluff of the Fed for at least two more hikes, while markets have fully priced in one hike and done.

US Dollar Index technical analysis: steepest decline in over a year

The US Dollar on its sixth day of decline after one of the most brutal selloffs seen in a long time. It becomes clear that there is a complete division between the Fed and the markets after the US Consumer Price Index (CPI) has drawn a firm line between both parties. Markets have sold the US Dollar on all fronts which filters through into the US Dollar Index dropping 1% and has it nearing the psychological important 100.00 marker.

On the upside, look for 102.77 to provide resistance at the 55-day Simple Moving Average (SMA) that will partially re-gain its importance after having been chopped up that much a few weeks ago. Only a few inches above the 55-day SMA, the 100-day SMA comes in at 102.88 and could create a firm area of resistance in between both moving averages. In case the DXY made its way through that region, the high of July at 103.57 will be the level to watch for a further breakout.

On the downside the US Dollar price action is in orbit around 100.00. Expect to see several small new yearly-low prints to be unfolding throughout the day. Special notice for 99.42 which is a very important technical support and once tested, would mean a new 18-month low for the DXY.

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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