US Dollar squeezes out Friday's bets for a weaker Greenback

US Dollar price action fairly contained in the aftermath of the US Jobs report.
ISM Manufacturing jumps in favor of a stronger US Dollar.
The US Dollar Index is off its weekly low, though any headwind could snap the summer rally in the Greenback.

The US Dollar (USD) sees that the dices have been rolled and the outcome is that any attempt to weaken this Greenback has been squandered after the sum of the US Jobs report and the Institute for Supply Management Manufacturing Index. The actual jump in Nonfarm Payroll changes together with the surprise jump in the Prices Paid segment of the ISM Manufaturing Index are pointing to still pretty tight labor and inflation conditions. Bets throughout this week for a weaker US DOllar are being squeezed out with the Greenback advancing against most major peers near the European closing bell.

Traders got a perfect summary of the earlier datapoints seen this week, represented in the Jobs report: Nonfarm Payrolls change went up 187k, and even beated last month's print as it was revised down from 187k to 157k. So jobs were added in the month of August. It looks like the job market is thus still holding out very nicely against these elevate drates. Another hike by the Fed though starts to look doubtfull as the Average Hourly Earnings have dropped from 0.4% to 0.2% month-over-month, pointing to employers having to pay less in order to get staff hired and thus might abate any inflationary pressures.

Daily digest: US Dollar reluctant to move

In the background commodities are soaring with Crude Oil on a tear. Crude is jumping higher after Kuwait and Saudi crude export numbers point to a multi-year low in exports.
Senate Leader Chuck Schumer said that the focus net week will be on funding, preventing a shutdown.
In Asian trading the Chinese Yuan strenghtend against the Greenback after the People's Bank of China (PBoC) had cut the Forex Reserve Ratio by 0.02%.
The US jobs report from 12:30 GMT had a few key takeaways: the Nonfarm Payrolls change was a beat of expectations and a beat of July with a revised 157k for July been beaten by 187k for August. Average Hourly Eernings against July have declined from 0.4% to 0.2%. To summarize: people are still finding a job fairly easily, though are not starting to see those higher pays or have less room to get more wage in negotiations, which means less room for spending and less inflationary pressures around the corner.
The S&P Global Manufacturing Purchasing Managers Index (PMI) rose to 47.9, coming from 47.0 for the month of August.
Final confirmation from the earlier move on the back of the US Nonfarm Payrolls was expected to come from ISM Manufacturing PMI for August, which went from 46.4 to 47.6. Although still below 50, and thus in contraction, a surprise upbeat number. The ISM Prices Paid went from 42.6 to 48.4. The New Orders declined a little from 47.3 to 46.8. In line with the Nonfarm Payrolls Change uptick, the ISM Employment went higher as well from 44.4 to 48.5.
A similar picture to Thursday unfolds in the equity markets with the Japanese Topix index closes at +0.76%. The Hong Kong Hang Seng heads lower by 0.55%. European and US equities are very mildly in the green as traders really struggle to see a clear picture.
The CME Group’s FedWatch Tool shows that markets are pricing in an 89% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September. The prior 78% probability was quickly reassessed after the downbeat data from the JOLTS report.
The benchmark 10-year US Treasury bond yield trades at 4.16% and has halted its decline from earlier this week, with a bit of an uptick this Friday.

US Dollar Index technical analysis: there is the squeeze

The US Dollar was not expected to make any moves until the main event this Friday – the August NFP - and did not make any big ones after it neither. The ISM PMI numbers are backing up the still upbeat job numbers as the Employment element of ISM picks up, though still below 50 and in contraction. Certainly the uptick in the ISM Priced Paid segment from 42.6 to 48.4 shows that people are stilling to pay higher prices in order to get their goods, which is the main inflation engine in the economy.

On the upside, 103.74, the high of August 31, comes into play as the level to beat in order to halt this downturn. Once that level is broken and consolidated, look for a surge to 104.00, where 104.35 (the peak of August 29) is an ideal candidate for a double top. Should the Greenback go on a tear, expect a test at 104.47 – the six-month high.

On the downside, the summer rally of the DXY is set to be broken as only one element now supports the US Dollar. That is the 200-day SMA, and it could mean substantially more weakness to come once the DXY starts trading further below it. The double belt of support at 102.38 with both the 100-day and the 55-day SMA are the last lines of defence before the US Dollar sees substantial and longer-term devaluation.

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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