US Dollar soft ahead of Powell's words

USD is pressured by a pullback in US Treasury yields due to anticipated clarity on the Fed's policy.
Fed officials express concern over potential easing with the US economy growing above trend.
Investors await Powell’s remarks at the Jackson Hole Symposium on Thursday.

On Monday, the US Dollar (USD), measured by the US Dollar Index (DXY), declined to its lowest level since January around 102.20 following a pullback in US Treasury yields. Market participants are awaiting clarity on the Federal Reserve's (Fed) policy outlook.

Despite the modest setback, the US economy indicates sustained progress above trend, which suggests the market may be overestimating aggressive future easing.

Daily digest market movers: US Dollar weakens as market anticipates strong Fed easing

DXY Index is expected to weaken in the short term due to the market's perception that the Fed is set to relax monetary policy in light of recent data indicating an economic slowdown.
July Retail Sales report showed a stronger-than-expected rise, signaling resilient consumer spending and suggesting the US economy may not be as weak as feared.
The robust labor market continues to drive wage increases, supporting consumer spending and suggesting no immediate recession threat.
This suggests that the market seems to be overestimating the Fed, and that might get a surprise if the bank delays the cutting cycle.
On Thursday and Friday, Fed Chair Jerome Powell will be on the wires at the Jackson Hole Symposium, where markets will look for clues regarding the next steps.

DXY technical outlook: A weakening bias persists and DXY loses key support

The technical indicators for the DXY Index are consolidating, albeit in negative territory, reflecting subdued price action with the Relative Strength Index (RSI) down deeply near 30. The Moving Average Convergence Divergence (MACD) bars appear to be growing red, suggesting consistent selling pressure. The index break signals the end of sideways trading in the 102.50-103.30 channel, which strengthens selling arguments.

Support Levels: 102.20, 102.00, 101.80

Resistance Levels: 103.00, 103.50, 104.00

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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