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US Dollar edges lower ahead of inflation data

  • DXY Index exhibits mild losses at 105.35, indicating a modest bearish trend.
  • Market attention is centered on conservative Fed comments and April inflation expectations that could shape US Dollar outlook.
  • Bets on the Fed remain steady and also lend support to the USD.

The US Dollar Index (DXY) is trading mildly lower at 105.35 on Monday at the midpoint of the US session. The strong market odds and the Federal Reserve's (Fed) hawkish stance toward cutting interest rates limits the losses for the US Dollar. Any possible Greenback rally predominantly depends on major US data this week, particularly April’s Consumer Price Index (CPI) on Wednesday.

The US economy continues to exhibit robust growth in Q2, underpinning the USD's recovery following cautious Fed comments. Signals hinting at no imminent rate cuts have adjusted the market's easing expectations, fostering a more hawkish outlook. Fed officials' stance, while cautious, is largely data-driven, and key indicators such as CPI and Retail Sales due this week will drive the narrative.

Daily digest market movers: DXY mildly down ahead of CPI

  • Fed remains vigilant, limiting USD losses. Rate cuts are not imminent with the probability of a June cut decreasing from 10% to 5% at the start of last week. Probability of a July cut reduced to approximately 25% from 40%.
  • A November rate cut remains fully anticipated by the markets.
  • This week is crucial with three major economic figures expected: Producer Price Index (PPI), CPI and Retail Sales. Market predictions suggest persistent inflation and robust growth in the US, which is likely to be verified by the upcoming data that would extend the Greenback’s rally.

DXY technical analysis: DXY reflects a probable bearish outlook despite bulls' efforts

The current technical picture of the DXY shows mixed signals that lean toward a more bearish outlook. The Relative Strength Index (RSI) prominently reveals a negative slope and is entrenched in negative territory. This points to a growing dominance of selling pressure, indicative of weakened buying momentum and a potential downward trend. Simultaneously, the Moving Average Convergence Divergence (MACD) displays flat red bars, a signal that, despite a struggling bullish momentum, the bearish momentum is failing to make strong gains.

As for the Simple Moving Averages (SMAs), they exhibit intricate dynamics. The DXY is trading beneath the 20-day SMA, representing short-term bearish dominance. However, the fact that the Index still remains above both the 100 and 200-day SMAs may hint toward potential long-term bullish pressure.

Central banks FAQs

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%.

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.

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%.

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

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

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US Dollar edges lower ahead of inflation data