US Dollar squashed against 104 with December CPI lower than expected
- The US Dollar softer after weaker US CPI revisions
- Traders are seeing risk on take over with Spoos snapping 5,000 marker.
- The US Dollar Index fails to close above the 100-day SMA and could slide back below 104.
The US Dollar (USD) is lower this Friday after the US opening bell with some Risk On creeping in after the S&P 500 has hit 5,000 briefly after the opening of the trading session. Talk of the town this Friday are headlines in the papers with the landslide victory of former US President Donald Trump in both Nevada and the Virgin Islands, giving him a comfortable lead already early in the Primaries. The second big topic is the interview of former Fox news reporter Tucker Carlson with Russian President Vladimir Putin where the broad strokes are that Putin is not interested in invading the West, only Ukraine.
On the economic front, a blank sheet with no economic data to report besides the publication of the revision of the Consumer Price Index (CPI) weightings and results. Once a year, in January, the Bureau of Labour Statistics (BLS) revises and recalculates the seasonal adjustedment factors which saw the recent December inflation numbers even lower than expected. One US Federal Reserve Speaker is due to make an appearance after the European Closing Bell. Lorie Logan from the Dallas Fed is set to speak around 18:30 GMT.
Daily digest market movers: Touch softer
- Germany's final inflation reading for January saw yearly Headline inflation closing off at 2.9%.
- Martin Kazaks from the European Central Bank Council said that rate cuts will be taking place this year for the ECB. It is just a matter of when the data is confirming the right time.
- The Senate is advancing with the aid for Ukraine and Israel, detaching the US Border Deal from the bill.
- The Bureau of Labor Statistics said Headline Inflation was actually at 0.23%, not at 0.3%. The Core was seen at 0.28% instead of 0.31% for its monthly performance. The revised 4Q Core CPI is at 3.3%.
- Equity markets are in the green with the US opening bell behind them. The S&P 500 finally breaks above 5,000.
- The CME Group’s FedWatch Tool is now looking at the March 20th meeting. Expectations for a pause are 84.5%, while 15.5% for a rate cut.
- The benchmark 10-year US Treasury Note trades near 4.18%, though the jump in the yield from the lower 4.06% earlier this week is not reflected in the US Dollar.
US Dollar Index Technical Analysis: A bit too enthousiastic
The US Dollar Index (DXY) is showing fatigue after the cost of finally moving away from the 200-day Simple Moving Average (SMA) near 103.61. Ideally a close above the 100-day SMA at 104.27 would have set forth the Greenback for more gains into next week, though US Dollar bulls are not supporting that plan. Instead, a week of false breaks took place and could mean that the DXY now falls back to the 200-day SMA for support.
Should the US Dollar Index move higher again, first look for a test at the peak of Monday, near 104.60. That level needs to be broken and is more important than the 100-day SImple Moving Average snap at 104.28. Once broken above that Monday high, the road is open for a jump to 105.00 with 105.12 as key levels to keep an eye on.
The 100-day SMA (104.28) is clearly the unreliable boyfriend in the rally at the moment. A false break on Monday and no support provided on Tuesday from the moving average opens the door for a bit of a squeeze lower. The first ideal candidate for support is the 200-day SMA near 103.61. Should that give way, look for support from the 55-day SMA near 103.02 itself.
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.
