US Dollar soft as markets await CPI figures

DXY index slips below 103.00 as US Producer Price Index figures disappoint.
US economic growth continues to trend upwards, suggesting markets may be overestimating aggressive easing requirements.
CPI is now in focus for a clearer inflation outlook.

Patricio Martín FXStreet

On Tuesday, the US Dollar (USD), measured by the US Dollar Index (DXY), showed a mild decline falling under the 103.00 level. This drop followed disappointing Producer Price Index (PPI) figures, which fell short of analysts' estimates.

Based on the entire economic data, the US economy continues to achieve growth above the trend. This suggests that market participants may be overestimating the need for aggressive monetary easing as the Federal Reserve (Fed) may request more data before cutting.

Daily digest market movers: Mild decline follows underwhelming PPI figures

The release of the Producer Price Index (PPI) for final demand in the US showed a YoY rise of 2.2% in July, less than the market expectation of 2.3%.
The annually adjusted core PPI also rose by 2.4%, missing analysts' estimated increase of 2.7%.
On a monthly scale, the PPI saw a 0.1% rise, while the core PPI remained unmoved.
As for now, A 50-basis-point cut is possible but will entirely depend on the data, with current odds at around 55%. The market is still fully expecting 100 basis points of easing by the end of the year and a total of 175-200 basis points of trimming over the next 12 months.
This rate path seems improbable unless the US economy enters a severe recession.

DXY technical outlook: Bearish trends continue amid weak buying efforts

There is no significant change in the technical outlook for DXY, bearing in mind the moderate selling pressure. The momentum-based Relative Strength Index (RSI) is stable below the 50 mark, indicative of a sustained selling approach. The Moving Average Convergence Divergence (MACD) continues to graph negative values as the red bars level off, demonstrating continued bearish activity despite flat market movement on Tuesday.

The Index position rests beneath the 20, 100 and 200-day Simple Moving Averages (SMAs), pointing to a predominantly bearish trend.

Support Levels: 102.80, 102.50, 102.20

Resistance Levels: 103.00,103.50, 104.00

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

Patricio Martín

FXStreet

Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.

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