US Dollar extends gains on the back of higher US Treasury yields after hot CPI figures

Core and Headline CPI rose higher than expected in February.
Despite higher inflation, weak labor market data reported last Friday would seem to limit the USD’s gains.
Expectations still point toward the interest rate easing cycle starting in June.

The US Dollar Index (DXY) is currently trading slightly higher at 103.05. Despite the report of hot US Consumer Price Index (CPI) figures, the index stands near its December lows.

After The US labor market showed mixed figures for February, the hot CPI figures failed to trigger major changes in expectations. Markets still expect 75 bps of easing in 2024 by the Federal Reserve (Fed) starting in June.

Daily digest market movers: DXY gains ground on hot CPI figures

In February, US inflation, measured by the Consumer Price Index (CPI), rose by 3.2% on a yearly basis vs the rise of 3.1% in January.
The Annual Core CPI, which excludes volatile food and energy prices, also saw an increase, rising to 3.8% in February. However, this was below the January increase of 3.9%.
US Treasury bond yields are climbing with the 2-year yield at 4.60%, the 5-year yield at 4.14%, and the 10-year yield at 4.15%.

DXY technical analysis: DXY bulls step in, outlook still negative

The technical outlook shows an escalating bullish momentum. The continuous escalation highlighted by the Relative Strength Index (RSI) portrays a more pronounced buying momentum despite it being in negative territory, indicative of a potential bullish market reversal. This in combination with the decreasing red bars of the Moving Average Convergence Divergence (MACD) suggests that the selling pressure is marginally declining.

However, the dynamics change when viewed through the lens of the larger context, where the index is still under the 20, 100, and 200-day Simple Moving Averages (SMAs). This placement reflects that bears have been exhaustively active in market dominance, exerting sustained downward pressure on the DXY, which took the Index to December lows.

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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