US Dollar keeps gains heading into Wednesday's US trading session with Nvidia being the main event

The US Dollar recovers further after after a volatile Tuesday.
Markets are heading into risk-on ahead of the much anticipated Nvidia earnings.
The US Dollar index trades up in the 106.50 area, still looking for support to bounce off from.

The US Dollar (USD) has a very calm Wednesday and recovers further into the US trading session, with the DXY Index trading around 106.5, as market sentiment turns risk-on ahead of the Nvidia earnings release after the US closing bell. Overnight in the US session, markets reversed the initial concerns about the escalated situation between Russia and Ukraine after Russian President Vladimir Putin said he is open to a peace deal brokered by President-elect Donald Trump.

The US economic calendar is still rather empty on Wednesday, except for the weekly Mortgage Applications data. The focus shifts to the Federal Reserve (Fed), with four Fed speakers set to release comments for the markets. That December interest-rate cut remains in limbo, with traders unsure whether the Fed will stick to its previous commitment to cutting rates in December again.

Daily digest market movers: Nvidia is becoming as important as the Fed

Geopolitical headlines on Ukraine and Russia point to an easing of tensions after Russian President Vladimir Putin confirmed that he would be open to a ceasefire discussion with President-elect Donald Trump, Reuters reports.
At 12:00 GMT, the Mortgage Bankers Association (MBA) released the weekly Mortgage Applications. This week’s number came in at 1.7% against last week’s numbers, which was an increase of 0.5%.
Near 15:00 GMT, Federal Reserve Vice Chair for Supervision Michael Barr testifies about the oversight of prudential regulators before the House Financial Services Committee in Washington DC.
Federal Reserve Governor Lisa Cook delivers a speech about the US economic outlook and monetary policy at the University of Virginia Department of Economics in Charlottesville, Virginia at 16:00 GMT.
Near 17:15 GMT, Federal Reserve Governor Michelle Bowman delivers a speech about "approach to agency policymaking" at the Forum Club of the Palm Beaches in West Palm Beach, Florida.
Federal Reserve Bank of Boston President Susan Collins delivers remarks and participates in a conversation at an event organized by the Ford School in Ann Arbor, Michigan at 21:00 GMT.
Equities remain in good spirits while heading into the US trading session. Gains across the board in both Europe and the US ahead of Nvidia's earnings.
The CME FedWatch Tool is pricing in another 25 basis points (bps) rate cut by the Fed at the December 18 meeting by 59.1%. A 40.9% chance is for rates to remain unchanged. While the rate-cut scenario is the most probable, traders have significantly pared back some of the rate-cut bets compared with a week ago.
The US 10-year benchmark rate trades at 4.43%, sliding further away from the high printed on Friday at 4.50%.

US Dollar Index Technical Analysis: No breakout means not change of stance

The US Dollar Index (DXY) edges up slightly in the mid-106.00 region on the daily chart. Markets have let the dust settle on the geopolitical headlines from Tuesday and are eagerly awaiting the Nvidia earnings later this Wednesday. As Trump trade is starting to unwind, the DXY might need to look for lower support in order to attract buyers.

After a brief test and a firm rejection last Thursday, the 107.00 round level remains in play. A fresh yearly high has already been reached at 107.07, which is the static level to beat. Further up, a fresh two-year high could be reached if 107.35 is broken.

On the downside, a fresh set of support is coming live. The first level is 105.93, the closing from November 12. A touch lower, the pivotal 105.53 (April 11 high) should avoid any downturns towards 104.00.

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.

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