- The US Dollar dips on Monday as Friday's selling pressure continues.
- Market sentiment turns nervous on an eventful week in the US economic calendar. .
- The US Dollar Index slides below 104.00 and could fall further on the back of data later this week.
The US Dollar (USD) is dipping lower on Monday, despite nothing market moving taking place at the start of this week. Two main drivers for the Greenback to keep in mind this Monday: First, the landslide victory for former US President Donald Trump over Nikki Haley’s home state South Carolina, which puts Trump very close to secure the required amount of delegates for a Presidential bid. Second, the vast amount of key economic data points that are set to be released throughout this week, with second reading of the US Gross Domestic Product on Wednesday and the Personal Consumption Expenditures (PCE) Price Index on Thursday as the main drivers that could tip the market in any direction.
The week is off to a quiet start, with a very light calendar Still, the tone could get set already with the New Home Sales data. A further decline, together with the decline seen in Building Permits and Housing Starts last week, could confirm that the housing market is coming under pressure from this elevated interest-rate regime.
Daily digest market movers: Early position taking
- Goldman Sachs said that Hedge Funds are offloading Tech shares at the fastest pace in seven months, Bloomberg reports.
- In London, a big energy conference is set to take place. Traders will be on the lookout for any headlines from major energy ministers and key people about Oil, Gas, and alternative energies.
- At 15:00 GMT, New Home Sales data will be published. Sales are expected to increase from 0.664 million to 0.680 million. Housing data last week pointed to some lowdown, which could get confirmed with this release. A slowing housing market could become a concern for the US Federal Reserve as it might be forced to lower its benchmark rates if potential issues in the US housing market spread to the financial system.
- The US Treasury will have a very busy day this Monday:
- Near 16:30 GMT, a 3-month and a 6-month bill are due to be released.
- At 18:00 GMT, a 2-year and a 5-year note will be placed in the market.
- Equities are starting to turn, off session's lows ahead of the US opening bell with the Nasdaq futures mildly in the green, pulling European equities nearly out of their intraday losses.
- According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the March 20 meeting are at 97.5%, while chances of a rate cut stand at 2.5%.
- The benchmark 10-year US Treasury Note trades around 4.25%, which is more than 10 basis points lower from the peak last week.
US Dollar Index Technical Analysis: Volatility set to peak this week
The US Dollar Index (DXY) is facing some downside pressure on Monday. Expect a very nervous build-up to the main event on Thursday, the Personal Consumption Expenditures (PCE) Price Index release. The uptick in both the Consumer Price Index (CPI) and the Producer Price Index (PPI) numbers over the past two weeks is lifting market expectations for the PCE index, which means any number undershooting expectations might trigger a substantial leg lower in the DXY.
To the upside, the 100-day Simple Moving Average (SMA) near 104.05 is the first level to watch as it is a support that has been turned into a resistance. Should the US Dollar be able to cross 104.60, 105.12 is the next key level to keep an eye on. One step beyond there comes 105.88, the high from November 2023. Ultimately, 107.20 – the high of 2023 – could even come back into scope, but that would be when markets reprice the timing of a Fed rate cut again, possibly delaying it to the last quarter of 2024.
Looking down, the 200-day Simple Moving Average at 103.73 was broken on Thursday and should see more US Dollar bears flock in to trade the break. The 200-day SMA should not let go that easily, so a small retreat back to that level could be more than granted. Ultimately, it will lose its force with the ongoing selling pressure and could fall to 103.16, the55-day SMA.
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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