US Dollar sinks as Middle Eastern ceasefire talks sparks safe haven outflow

The Greenback pulls back after Qatar metions a ceasefire deal is speeding up between Israel and Palestina.
US yields sunk lower after attempting to soar back to 5% on Thursday.
The US Dollar Index is set to lock in a fresh weekly gain despite a downbeat trading day.

The US Dollar (USD) had a wild ride again on Thursday as the European Central Bank turned out to be a non-event. Rather the wild ride in the US equity markets thereafter made the US Dollar Index (DXY) pull back. The sell-off in US equities, with the Nasdaq leading the decline, saw investors flee to safe havens such as US bonds.

On the economic data front the focal point this Friday is the Personal Consumption Expenditures Index. Both the monthly change and the change against last year were both in line as expected, with no surprises that could mean difficulties for the Federal Reserve. So smooth sailing for the Greenback towards the Fed meeting next week.

Daily digest: US Dollar retreats on safe haven outflow

After the US Opening Bell reports and headlines were issued that Qatar is brokering a ceasefire deal in the Middle East which is moving 'quickly'.
Biggest data point for this Friday were the Personal Consumption Expenditures Index
1. The Core monthly Price Index went from 0.1% to 0.3%.
2. The Core yearly Price Index printed a move from 3.8% to 3.7%.
3. The Overall monthly Price Index went from 0.4% to 0.4%.
4. The Overall yearly Price Index headed from 3.4% to 3.4%.
5. Personal Income for September went from 0.4% to 0.3%.
6. Personal Spending for September is to head from 0.4% to 0.7%.
Near 14:00 the last data point for this week came out with the Michigan Consumer Sentiment Index for October
1. Consumer Sentiment went from 63 to 63.8.
2. The Consumer inflation expectation were unchanged near 3%.
Equities are in the green as investors are picking up the pieces from the steep decline on Thursday. In Asia the Hang Seng is up 2%. Europe remains sidelined as is set to close this Friday flat. US equity futures are seeing Nasdaq futures up near 1%.
The CME Group’s FedWatch Tool shows that markets are pricing in a 99.4% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
The benchmark 10-year US Treasury yield trades at 4.84%, retreating a bit further as markets are heading into safe haven assets after the steep decline from US tech stocks overnight.

US Dollar Index technical analysis: US Dollar weaker on safe haven outflow

The US Dollar is trading in the green for this week, although a rejection on the topside on Thursday might see those weekly profits getting a touch smaller. The rejection came after the US Dollar Index (DXY) peaked on the back of a snooze fest ECB meeting. Do not expect a full paring back, though a very firm rally in the DXY is neither anticipated, ahead of the Federal Reserve meeting next week.

The DXY has consolidated above 106.00 and looks to keep stretching higher. Line in the sand is 106.84 that has triggered a rejection on the topside. Once broken through there, the high of October at 107.35 comes into play for a retest.

On the downside, the recent resistance at 105.88 did not do a good job supporting any downturn and now completely has lost its importance. Instead, look for 105.12, which is a pivotal historic line and almost falls in line with the 55-day Simple Moving Average (SMA) to keep the DXY above 105.00, and which worked already quite ahead of it on Tuesday. Should this level fail to do the trick, a big air pocket could develop and see the DXY drop to 103.74, near the 100-day SMA, before finding ample support.

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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