US Dollar starts the week soft due to weak housing data

The DXY Index slips on Monday, trading down to 103.80.
Fed's hesitance to cut rates has stirred the market and may limit DXY losses.
New Home Sales data for January was lower than expected at 0.66 million.

The US Dollar Index (DXY) is trading at 103.80, reflecting a slight decline. The underperformance comes after the report of soft January housing data from the US, while the Federal Reserve (Fed)'s expressed hesitation toward premature rate cuts may limit the downside. Looking forward, investors await significant forthcoming reports to glean further understanding of the health of the economy including Core and Personal Consumption Expenditures (PCE) and Gross Domestic Product (GDP) revisions later this week.

The Fed, unwavering since January's FOMC meeting, rejects premature rate cuts. Markets heed the stance with the odds of March and May cuts remaining low. As for now, the best-case scenario for markets is that the bank will start cutting in June, but it will all come down to the incoming data. PCE data and GDP revisions will be key.

Daily digest market movers: US Dollar weakened by soft housing data

January's New Home Sales, as reported by the US Census Bureau, exceeded market expectations by 0.66M against the forecast of 0.68M.
As per the CME FedWatch Tool, a hold in the March and May meetings are being priced in, while the odds of a cut in June remain the strongest case, but the odds are somewhat low, around 53%.
In case PCE and GDP data come in softer than expected, those odds may change in favor of dovish rhetoric and weight on the US Dollar.

Technical analysis: DXY Index’s bearish movement dominates as sellers conquer key level

On the daily chart, the Relative Strength Index (RSI) exhibits a negative slope residing in negative territory, an indication that selling pressure outweighs buying momentum in the market. Concurrently, the Moving Average Convergence Divergence (MACD) signals a bearish outlook as well. The red bars are lengthening on the histogram, implying rising selling momentum. This highlights an amplified bearish force, contributing to the weakening of the pair.

However, the positioning of the Simple Moving Averages (SMAs) paints a more nuanced picture. Despite the Index now trading below the 20-day and 100-day SMAs, which supports the bearish sentiment, it's still above the 200-day SMA. This upward breach can be interpreted as a demonstration of robust resilience by the bulls in the larger context, hinting that buyers are fighting to regain control. That being said, credit should be granted to bears, who managed to breach the key 20-day average, which recently acted as a key support.

This suggests that, for now, the selling force is dominant over the buying momentum, but if the buyers defend the 200-day SMA, the overall positive bias will remain intact.

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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