US Dollar starts the week with the left foot, focus set on CPI figures from March

DXY Index is currently trading at 104.15 with mild losses.
March’s CPI report is due on Wednesday, investors will monitor its outcome for more direction on the economy's health.
Markets still expect the Fed’s easing cycle to start in June.

The US Dollar Index (DXY) is currently trading at a modest loss at the 104.15 level. Mild market fluctuations for the USD continue to make waves as the Federal Reserve’s (Fed) cautious stance is calibrated in light of incoming data. Hot labor market figures reported last week may justify the delay of the easing cycle, while Fed officials ask for patience.

The US economy has yet to show clear evidence of a moderation of inflation and economic activity, which makes the Fed comfortable to start cutting rates. In case data shows a resilient economy and easing expectations adjust, the USD may see further upside.

Daily digest market movers: DXY losses limited by US economy strength and rising Treasury yields

Given the current steady expansion and continued inflation in the US economy, the Fed stays wary of modifying monetary policy and its officials ask for caution.
Markets are still pricing in higher odds of around 60% of the easing cycle to start in June.
US Treasury bond yields demonstrate a slight increase. The 2-year yield stands at 4.78%, the 5-year at 4.41%, and the 10-year at 4.33%.
On Wednesday, the US will release Consumer Price Index (CPI) data from March, a crucial inflation indicator.
The headline figure is seen accelerating, while the core measure is seen cooling down. The outcome of the index will likely fuel volatility in the USD dynamic via movements in Treasury yields and Fed expectations.

DXY technical analysis: DXY bulls remain weak with bears around the corner

The indicators on the daily chart reflect a mixed sentiment in the market. The Relative Strength Index (RSI) has a negative slope but maintains itself in positive territory, indicating that there's uncertainty among the market participants and a lack of a firm directional bias.

In addition, there may be a hint of bearish momentum as the Moving Average Convergence Divergence (MACD) indicator shows decreasing green bars, signifying a possible slowdown in the buying power. This could mean that the bears are slowly gaining the upper hand. However, the DXY is positioned above its 20, 100 and 200-day Simple Moving Averages (SMAs), insinuating an underlying bullish sentiment.

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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