US Dollar tests support on the downside after PCE pushes back against Fed

The US Dollar trades lower on softer PCE and spending numbers.
Markets are seeing no reason to believe the rate hike calls from Fed officials.
The US Dollar Index trades towards lower levels at 104.00.

The US Dollar (USD) trades lower on Friday ahead of the US trading session with US Personal Consumption Expenditures (PCE) out of the way. Although no big surprises, the confirmation that disinflation is still on track is good confirmation. Traders are now comfortable to ignore recent calls and concerns from Fed officials to stark talking about a rate hikes.

On the economic data front, markest no big data elements ahead for this Friday. Next week promises to be a bit more eventful with the US Jobs Report on Friday and a big slew of data set to be released in the runup towards the number. .

Daily digest market movers: PMI massacre

The Personal Consumption Expenditures Price Index for April:
- The monthly Headline PCE came in as expected at 0.3%, unchanged, while the yearly headline PCE was steady as well at 2.7%.
- The monthly core PCE went from 0.3% in March to 0.2% for April. Yearly core PCE remained unchanged at 2.8%.
- Personal Income fell to 0.3%, slowing from the 0.5% a month earlier.
- Personal Spending fell to 0.2% from 0.7%.
The Chicago PMI for May came in lower than the previous 37.9, at 35.4, substantially lower than the 41 forecast.
Federal Reserve Bank of Atlanta President Raphael Bostic will close off this Friday by delivering a speech at the Augusta Technical College's spring commencement ceremony near 22:15 GMT.
Equities are loving the softer PCE number with both Europe and the US main indices in the green.
According to the CME Fedwatch Tool, Fed Fund futures pricing data suggests a 49.0% chance for keeping rates unchanged in September, against 45.1% chance for a 25 basis points (bps) rate cut and a 5.4% chance for an even 50 bps rate cut. A marginal 0.5% price in an interest rate hike.
The benchmark 10-year US Treasury Note trades around 4.49%, and is falling further.

US Dollar Index Technical Analysis: Is the Fed in a policy mistake?

The US Dollar Index (DXY) has tossed the coin and it fell in disfavor of the Greenback. Clear devaluation for the US Dollar with disinflation back on track. The markets can now brush off nearly in full the recent remarks from some Fed officials saying that a rate hike might be needed first.

On the upside, the DXY index reclaimed the key levels: the 55-day Simple Moving Average (SMA), currently at 104.98, and the 105.00 big round level. 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 104.43 and the 100-day SMA around 104.40 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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