US Dollar back to flat as markets digest ADP and ISM numbers
- A chunky batch of economic data moved markets together with a stressful Polish central bank meeting.
- Focal point this week is US Nonfarm Payrolls on Friday.
- US Dollar Index breaks above 107 and prints 11-month high.
The US Dollar (USD) was a recipe for traders to get burned at this Wednesday either way as both ADP and ISM numbers moved the needle for the Greenback to an intraday high and an intraday low. Expect volatility to only ramp up further towards Friday with the US jobs report as focal point. The Polish central bank decision this month, after a surprise 75 basis point cut, was a snooze fest with only a 25 basis point cut.
Traders saw the ADP numbers shrink substantially sub 100,000 and being a big miss on estimates. Although there is no proven correlation with US nonfarm payrolls on Friday, it will see some prepositioning towards it. After the ADP numbers, the Institute of Supply Management (ISM) came out with data points for the service sector for the month of September, despite declines were still above 50, not contracting just yet.
Daily digest: US Dollar stronger with still positive ISM
- At 11:00 GMT the Mortgage Bankers Association (MBA) has issued the weekly Mortgage Applications figure for the end of September. The previous week saw a decline of -1.3% and for the last week of September declined even further by -6.0%.
- The ADP Employment Change for September has been issued, and it was a substantial miss on estimates, heading to 89,000, coming from a revised 180,000. A big miss on estimates for 150,000.
- Ahead of the ISM data, traders faced the S&P Global’s Purchasing Managers Index (PMI), issued for both the Services sector and the Composite for the month of September: Services PMI contracted from 50.2 to 50.1. The Composite soared from 50.1 to 50.2.
- Data from the ISM for the month of September was rather a disappointment. The Services Employment Index was at 54.7 last time around and declined further to 53.4. New Orders Index was 57.5, and slided to 51.8. Services PMI was expected to head from 54.5 to 53.6 and fell in line with that estimate. The Prices Paid Index was unchanged at 58.9.
- Additionally at that time, the Factory Orders for August are due to come in, jumping higher from -2.1% to 0.3%.
- No shockwaves from the Polish central bank (NBP) after its suprise 75 basis point rate cut in September. It turned out into a snooze fest with only a 25 basis point cut and a stronger Polish Zloty in the aftermath.
- Equities are turning mixed in late European trading: Asian stocks are all down over 2% across the board. European and US equities turned green after the ISM data points.
- The CME Group FedWatch Tool shows that markets are pricing in a 71.2% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November. That is a touch lower from the 77.5% a week ago.
- The benchmark 10-year US Treasury yield is peaking at 4.78%, printing a new high yet again for the year. The rate differential story is back as a driving force in the US bond market.
US Dollar Index technical analysis: DXY off the low for Wednesday
The US Dollar rally looks to hit the pause button for a day as traders brace for a pick up in volatility. The big batch of data will play a pivotal point. Next to that, the Relative Strength Index (RSI) is trading again firmly into overbought territory, which could limit any further upside moves in the DXY for the remaining days this week.
The US Dollar Index opened around 107.24, though the overheated Relative Strength Index (RSI) is acting as a cap now that it is trading in an overbought regime. With 107.19 – the high of November 30, 2022 – being tested as we speak, it will be important to see if DXY can get a daily close above that level. If that is the case, 109.30 is the next level to watch.
On the downside, the recent resistance at 105.88 should be seen as first support. Still, that barrier has just been broken to the upside, so it isn’t likely to be strong. Instead, look for 105.12 to do the trick and keep the DXY above 105.00.
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.
Author
Filip Lagaart
FXStreet
Filip Lagaart is a former sales/trader with over 15 years of financial markets expertise under its belt.
