US Dollar recovery stalls ahead of Wednesday's inflation numbers

The US Dollar turns around 180 degrees on Tuesday, paring back losses from Monday.
The US Treasury is set to auction its always important 10-year note.
The US Dollar Index jumps back above 104.50 and looks set to stretch back to 105.

The US Dollar (USD) is nearly flat ahead of overall US inflation report on Wednesday. After its lackluster performance on Monday, the Greenback was on the cusp of breaking above the high of Monday. Though, right at that moment, the US Dollarindex is taking small step back is nearly flat for the week, which means the US Consumer Price Index (CPI) print will be the determinating factor for this week to where the Greenback will be going to.

Although the calendar is still holding any important data points, expect traders to start prepositioning for the US Consumer Price Index report (CPI) due Wednesday. The Bid/Cover ratio in the US 10-year note, meanwhile, will give investors good insight into whether participants believe the US can still bear these higher rates and refund its maturing debt in the meantime. Expect to see yields creep higher again in the US as ample supply is being issued yet again in the markets.

Daily digest: US Dollar recoups

Traders will have seen a blip on several charts in Euro and US Dollar against other currencies around 01:00 GMT. Several banks are confirming that a fat-finger event occurred where a $600 million forex order was given, instead of the foreseen $60 million. The peak or dip was quickly pared back once the mistake was discovered, though it triggered anomalies across the board in several major pairs.
This week finally kicked-off with some US macro data: the Business Optimism Index from the National Federation of Independent Business (NFIB) came in steady at 91.3, from 91.9 previous month.Althoug this might be a small step back, the number as such is still a very elevated one.
At 17:00 GMT, the much anticipated US 10-year note will be auctioned. The previous rate was at 3.99% and is expected now to be above 4%. Traders will look at the bid-cover ratio as well to see how big the appetite was for this auction as yields will be fixed higher.
Equities are taking a small step back after the Japanese Topic Index closed up 0.80% for this Tuesday.
The CME Group FedWatch Tool shows that markets are pricing in a 93% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September.
The benchmark 10-year US Treasury bond yield trades at 4.29% and remains elevated even after the step back on Monday.

US Dollar Index technical analysis: back to square one

The Greenback made it back to square for this week, though not further. The winning streak from last week got briefly interrupted and could be seen continuing as of this Tuesday. Should the US Dollarindex (DXY) break above the high of Monday, expect to see another upbeat week for the US Dollar Index

The new high to watch is at 105.16, both the high from last Thursday and the six-month high. The US Dollar Index first needs to gain back its lost territory from this Monday and break above the peak of Thursday mentioned here before. From there, the next high is at 105.88, the high of 2023.

On Monday, 104.44 kept it together and refrained from allowing the DXY from selling off any further. The high of August 25 did its job and acted as a pivotal level. Should the uptick from this Tuesday reverse and 104.44 gives way, a substantial downturn could take place to 103.04, where the 200-day SMA comes into play for support.

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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