US Dollar closes the week soft, markets digest cautious Fed

Cautious Fed officials and robust Q2 growth limits the USD downside.
Markets continue to bet that the easing cycle will start in September.
If data continues to underperform, the Fed might consider a July rate cut.

The US Dollar Index (DXY) is currently trading at 104.50, maintaining a neutral stance. Strong The overall Q2 growth backed by the Federal Reserve’s (Fed) cautious stance has offered mild gains to the US Dollar at the end of the week.

Despite some signs of softness, the US economy continues to exhibit robust growth in Q2 overall, directly influencing the cautious stance adopted by Fed officials. This reluctance to implement rate cuts seems to be keeping the Greenback afloat and limiting the downside.

Daily digest market movers: DXY stands neutral ahead of the weekend, Fed remains cautious

April's Consumer Price Index (CPI) and Retail Sales figures, plus an increase in weekly Initial Jobless Claims, prompted the US Dollar to lose value earlier this week.
Raphael Bostic, President Atlanta Fed, speaks positively about inflation progression in April but declares the Fed is not prepared to lower the policy rate.
Loretta Mester, President of Cleveland Fed, feels the monetary policy positioning is fitting as data comes under review. Thomas Barking of the Richmond Fed believes that current inflation rates still have targets to meet.
According to CME FedWatch Tool, markets are betting on higher odds of the first cut coming in September.

DXY technical analysis: DXY outlook remains negative despite indicators flattening

The daily chart indicators are exhibiting signals of uncertainty. Despite the Relative Strength Index (RSI) staying flat in negative territory, it does not fully endorse the presence of a robust selling momentum. Similarly, the Moving Average Convergence Divergence (MACD) is flat with red bars, indicating a potential pause in the aggressive bearish trend.

On the flip side, the Simple Moving Averages (SMAs) paint a contrasting picture. The DXY Index, after having sustained a fall and subsequently rebounded at the 100-day SMA, remains below the 20-day SMA. This suggests that the bears had been temporarily holding ground. However, remaining above the 100 and 200-day SMAs indicates that the bulls are not entirely out of the picture.

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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