US Dollar declines ahead of Powell's speech and labor market data
- The DXY Index is significantly lower, near 103.65, on Tuesday.
- The ISM Services PMI from February reflected lower-than-expected figures.
- Jerome Powell testifies before Congress on Wednesday
- The focus now turns to labor market data.
The US Dollar Index (DXY) is trading around 103.65, losing some ground. The causes for these latest movements are primarily focused on February's Purchasing Managers Index (PMI) report on the Services sector from the Institute for Supply Management (ISM), which came in lower than expected. If markets start to fear an economic slowdown, they may start to bet on a less aggressive Federal Reserve (Fed).
Despite some evidence of softness in the US economy, it is showing resilience overall. This is making investors confident that the Fed will start easing in June, which may provide a cushion to the US Dollar’s losses. The labor market data set to be released this week will be key to shaping those expectations.
Daily digest market movers: DXY loses some ground on weak data, hawkish bets on the Fed cooldown
- The ISM Services PMI for February, reported by the Institute for Supply Management, is 52.6, which fell short of the expected 53 but is fairly steady compared to January's 53.4
- An 80% probability of an interest rate reduction in June is being anticipated by the markets, which means a decrease from 100% at the end of the previous week.
- US Treasury bond yields are on the decline with 2-year yields trading at 4.56%, while the 5-year yields, and 10-year yields at 4.15%.
- Labor data reports to be released this week include February’s Nonfarm Payrolls, Average Hourly Earnings and the Unemployment Rate, all of which are closely followed by the Fed.
- The outcome of labor market metrics will shape the dynamics of the Greenback for the near term.
DXY technical analysis: DXY bears gain ground, conquer 200-day SMA
The Relative Strength Index (RSI) presently occupying negative territory with a negative slope supports the idea of bears’ wielding strength. This suggests that bears maintain a strong hand at this juncture. Likewise, the Moving Average Convergence Divergence (MACD) registers rising red bars, bolstering the narrative that selling momentum currently prevails.
Assessing the position of the index concerning its Simple Moving Averages (SMAs), it is now trading below the 20, 100 and 200-day SMAs, which suggests that unless the buyers make a move, the outlook has turned negative.
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.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
