US Dollar retreats while US elections are the main event in the coming hours

The US Dollar price action is starting to ease as the US heads to the voting booths on Tuesday.
Traders brace for volatility as it could take days or weeks to know who will be the next US president in case of a very tight result.
The US Dollar index trades just below 104.00 and hangs onto important technical support.

The US Dollar (USD) turns a touch softer on Tuesday after the US opening bell, with the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trading further below 104.00 as markets brace for the US presidential election. Chances that markets will know if either Vice President Kamala Harris or former US President Donald Trump will claim victory by Wednesday look rather slim. No less than 165 lawsuits have already been filed on election fraud and recount requests even before the voting has started.

This could mean that this 60th presidential election could surpass the 46 days of legal uncertainty last seen when George W. Bush won in 2000. Only a landslide victory by several points could avoid a legal battle that would plunge markets into uncertainty going into year-end.

The US economic calendar includes the final readings of the S&P Global and the Institute for Supply Management (ISM) Services Purchase Managers Index (PMI) for October. No real changes are expected from preliminary readings.

Daily digest market movers: Data to be ignored

Look out for headlines risk on Tuesday and Wednesday in case no clear winner is declared in the 60th US presidential election.
At 13:45 GMT, S&P Global is set to release the final reading for October’s PMI. Services PMI is expected to remain unchanged from the preliminary reading of 55.3, while the Composite PMI is expected to remain stable at 54.3.
At 15:00 GMT, the ISM is releasing its final reading for October’s services sector. The ISM Services PMI is expected to decline a touch to 53.8 from 54.9.
Ahead of the first possible headlines on the US presidential election, the US Treasury is auctioning a 10-year note around 18:00 GMT.
Equities are trading rather flat to mildly in the green for both Europe and the US while US voting booths have opened up.
The CME FedWatch Tool is backing a 25 basis point (bps) interest-rate cut by the Federal Reserve (Fed) on Thursday’s meeting with a 98.0% probability. More interesting is the December 18 meeting, where a 50 bps interest-rate cut from the current level is expected by an 81.7% chance, suggesting that markets anticipate a rate cut this week and in December.
The US 10-year benchmark rate trades at 4.33%, making its way back up to the 4.38% last seen at the close last Friday.

US Dollar Index Technical Analysis: All three stars need to be aligned

The US Dollar Index (DXY) is having its calm moment before the storm. It looks to be very unpredictable what the US presidential election outcome will be on Wednesday when the world will wake up. The DXY is clinging onto the 200-day Simple Moving Average (SMA) at 103.84, and it is expected to whipsaw through it in the next 24 hours once results come in.

The DXY has given up two key levels and needs to regain control of them before considering recovering toward 105.00 and higher. First up is the 200-day SMA at 103.84, together with the 104.00 big figure. The second element is the October 29 high at 104.63.

On the downside, the 100-day SMA at 103.12 and the pivotal level of 103.18 ( March 12 high) are the first line of defence. In case of rapid and volatile moves this week, look for 101.90 and the 55-day SMA at 102.16 to consider as substantial support. If that level snaps, an excursion below 101.00 could be possible.

US Dollar Index: Daily Chart

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.

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.