US Dollar declines on the back of soft CPI figures

The DXY fell to its lowest level since mid-April on Wednesday.
Weak US inflation data and unimpressive Retail Sales increase odds of a Fed interest rate cut in the near term.
Markets are still discounting higher odds of the first cut being in September.

The US Dollar Index (DXY) is trading near 104.4 on Wednesday, showing sharp losses triggered by the softer-than-expected Consumer Price Index (CPI) and flat Retail Sales figures from April.

The US economy is showing signs of pressure as inflation in April seems to have decelerated. Federal Reserve (Fed) Chair Jerome Powell's cautious stance, coupled with mixed Producer Price Index (PPI) readings, are highlighting concerns over future inflation dynamics, which seem to be weighing on the Greenback.

Daily digest market movers: DXY dives on soft CPI figures

US Bureau of Labor Statistics reported a decrease in the inflation rate to 3.4% YoY, down from 3.5% in the previous month and in line with market expectations.
Annual core CPI fell to 3.6% in April, coming down from 3.8% YoY in March and matching forecasts.
Both CPI and core CPI reported 0.3% increase MoM in this time frame.
Retail Sales in the US showed no growth in April, underperforming the 0.4% expected MoM rise and indicating a decline from the 0.6% MoM reported a month earlier.
Downturn in Retail Sales may signify potential trouble for US economy, possibly sending Fed to consider sooner rate cuts.
As per CME FedWatch tool, a hold in June is near to being priced in as odds of July cut slightly increase. The meeting with the highest odds of a cut is September’s FOMC.

DXY technical analysis: DXY shows negative bias, yet bullish signs remain

The indicators on the daily chart reflect a mixed technical picture for DXY but are largely tilted to the downside. The Relative Strength Index (RSI) displays a negative slope and is in negative territory, indicating strong selling momentum. This suggests that bears are gaining control in the immediate term. In addition, the Moving Average Convergence Divergence (MACD) shows rising red bars, signaling that bearish momentum is strengthening.

The asset's position relative to its Simple Moving Averages (SMAs) paints some optimism for the Greenback. Despite being below the 20-day SMA and thus facing short-term selling pressure, DXY remains above both its 100-day and 200-day SMAs. This means that, despite the recent bearish push, the medium-term to long-term trend still favors the bulls. However, the bears are approaching the 200-day SMA at 104.10, which in case of breaching it would paint the technical outlook with red.

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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