US Dollar retreats after ISM paints a nasty picture on Manufacturing in the US

The US Dollar trades in the red after very mixed ISM data.
Markets are in the green with Europe up near 1% and US equities trying to follow.
The US Dollar Index trades in the mid-104.00 region, though retreats to 104.00 after ISM print.

The US Dollar (USD) trades on the backfoot this Monday with the numbers from the Institute for Supply Management (ISM) as biggest driver for the Greenback weakness. The moves comes after the different data points reveal that there is easing at hand. The job component even fell further into contraction and might be a sign on the horizon that this week's US Jobs Report and its Nonfarm Payroll component might get ugly.

With all data points for this Monday out of the way, traders will start preparing for Tuesday. The Factory Orders and the US JOLTS Job Openings report will confirm wether the that the US jobs market is no longer as tight as traders thought. It becomes clear from already this Monday that this will be a pivotal week for the US Dollar Index (DXY).

Daily digest market movers: ISM split, which is bad news

Monday’s US calendar kicked off with the release of the final S&P Global Manufacturing PMI for May The final reading came in at 51.3, stronger than the 50.9 number.
At 14:00 GMT, the Institute for Supply Management released its recent findings from its monthly survey for May:
- The headline Manufacturing PMI index contraacted further from 49.2 to 48.7.
- The Employment Index jumped from 48.6 in April to 51.1 in May.
- The New Orders index fell further into contraction from 49.1 to 45.4.
- The Prices Paid index fell as well, from 60.9 to 57.
- Construction Spending is expected to rise 0.2% in April, swinging from a 0.2% contraction in March.
Equities are in the green across Europe, while US equities are having some difficulties with the Dow Jones signalling technical issues.
According to the CME Fedwatch Tool, Fed Fund futures pricing data suggests a 46.1% chance for keeping rates unchanged in September, against a 47.2% chance for a 25 basis points (bps) rate cut and a 6.7% chance for an even 50 bps rate cut. An interest rate hike is no longer considered an option.
The benchmark 10-year US Treasury Note trades around 4.41%, and heads to the lower end of its monthly range between 4.34% and 4.61%.

US Dollar Index Technical Analysis: End of consolidation this week

The US Dollar Index (DXY) is hanging a bit in no man's land this Monday after its negative performance last week. When looking at a weekly chart, the DXY is clearly in consolidation, posting with lower highs and higher lows as sellers and buyers are being pushed towards each other. In this context, normally a breakout is then set to take place, something that could happen this week taking into account the very busy economic calendar ahead.

On the upside, the DXY index reclaimed the key 105.00 round level, which broadly aligns with the 55-day Simple Moving Average (SMA). It will be important to see if these levels hold support should the US data weaken. Once that is proven, look for 105.52 and 105.88.

On the downside, the 200-day SMA at 104.44 and the 100-day SMA around 104.42 are the last line of defence. Once that level snaps, an air pocket is placed between 104.30 and 103.00. Should the US Dollar decline persist, the low of March at 102.35 and the low from December at 100.62 are levels to consider.

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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