US Dollar sees minor gains as markets gear up for the Fed's decision next week

The Greenback gears up to hold onto a 0.7% weekly gain.
Sentiment data from the University of Michigan came in weak.
On the bright side, Industrial Production data came in stronger than expected.
The focus will now turn to next week’s FOMC meeting.

The US Dollar Index (DXY) is registering slight gains at the level of 103.40 on Friday, rebounding from December lows amid rising US Treasury yields. This follows the release of hot inflation data this week. The resilience of strong economic indicators and a cautious stance from the Federal Reserve (Fed) against hasty easing offer potential for US Dollar recovery. Next week, all eyes will be on the updated Federal Open Market Committee (FOMC) forecast, which could give additional traction to the USD.

Despite persistent inflation in the US, incoming data will continue to dictate the timing of the easing cycle, expected in June. Investors overlook hot inflation rates as mixed labor market data seems to have overshadowed it. Next week’s FOMC Dot Plot might also recalibrate the market’s expectations.

Daily digest market movers: US Dollar to close the week with mild gains after mid-tier data

The University of Michigan reported the March Consumer Expectations index at 74.6, down from the previous figure of 75.2.
The Consumer Sentiment index for March was reported at 76.5, slightly down from 76.9 in the previous period.
The 5-Year Inflation Expectations remained steady at 2.9%.
On the positive side, the Industrial Production (MoM) for February came in at 0.1%, which was an improvement from the previous report of -0.5%.
US Treasury yields rise with the 2-year yield at 4.71%, the 5-year at 4.13%, and the 10-year at 4.29%.
The market anticipates no rate cuts from the Federal Reserve in the coming week, with eyes on whether the Fed can ensure a smooth landing. Projections for a cut in May stand at 10%, while the likelihood of a June cut is around 65%.
The market will focus on whether officials still envision three cuts in 2024.

DXY technical analysis: DXY sees a bearish undertone despite the recent bullish gains

The daily chart indicators reveal the dominance of selling momentum in DXY's technical landscape. The Relative Strength Index (RSI) prints a positive slope yet remains in negative terrain, suggesting that bears still hold the reins but with buyers building momentum. On the other hand, the Moving Average Convergence Divergence (MACD) histograms are showing decreasing red bars, highlighting decreasing selling pressure.

Adding to the bearish implications, DXY is trading below its 20, 100, and 200-day Simple Moving Averages (SMAs), pointing to a strong downtrend. This consolidation beneath the SMAs may suggest a short-term bearish outlook, offsetting any bullish attempt. Although bulls are gradually gaining ground, the prevailing selling momentum communicates strong downward pressure. Until the RSI climbs into bullish territory and MACD bars switch to the green zone, the bearish perspective 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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