US Dollar sees green on higher yields, eyes on Fridays ISM PMIs, Powell speech

  • The DXY Index marks a positive stride, trading with gains of 0.60% near the 103.50 area.
  • US PCE figures decelerated but showed no surprise, which gives reasons for the Fed to remain cautious.
  • Investors will eye November's ISM Manufacturing PMI report, which is due on Friday. Chair Powell will be on the wires.

The US Dollar (USD) is trending upward, and the US Dollar Index (DXY) exchanged hands on Thursday at 103.45. This USD strength is largely attributed to the latest US Personal Consumption Expenditures (PCE) inflation figures from the US, which fueled the USD and US yields higher. 

Despite cooling inflation and a mixed labor market, Federal Reserve (Fed) officials are not ruling out further policy tightening, hinting at a moderately hawkish stance. This is due to officials balancing the costs of doing too little and doing too much, as economic reports are giving mixed signals or not enough evidence of inflation coming down in the eyes of the Fed

Daily Market Movers: US Dollar gains momentum as PCE figures warn markets

  • The US Dollar maintained a strong trading position on Thursday, favoured by a sour market mood after the US PCE inflation figures and an uptick in yields. 
  • October's annual PCE Price Index, reported by the US Bureau of Economic Analysis, came in as expected at 3%, down from the previous rate of 3.4%.
  • Also for October, the annual Core PCE Price Index  matched consensus expectations at 3.5%, a decrease from the preceding rate of 3.7%.
  • The weekly report from the US Department of Labor revealed Initial Jobless Claims for the week ending November 25 stood at 218K, slightly below the predicted 220K but higher than the previous figure of 211K.
  • Those figures seem to have lowered the hype on markets and favour the cautious stance of the Fed, which is requesting more evidence on inflation coming down.
  • On Friday, the spotlight will be on the release of the Institute for Supply Management’s (ISM) Manufacturing PMI for November. Chair Powell will also deliver a speech.
  • US bond yields witnessed a rise, with numbers for 2-year, 5-year and 10-year yields logging in at 4.71%, 4.29%, and 4.34%, respectively.
  • In anticipation of the upcoming December meeting, the CME FedWatch Tool signals that markets have practically priced in a no hike. Additionally, markets predict rate cuts in mid-2024.

Technical Analysis: The US dollar gains some traction, but indicators highlight bear dominance

The Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD) histogram, and Simple Moving Averages (SMAs) on the daily chart collectively signal a stronghold of selling momentum. The RSI's position below the median line indicates a trend leaning toward the sellers despite showing a positive slope. The MACD histogram's negatives further underline the intact bearish pressures, but its bars flattened, reflecting that bears are taking a breather. 

Adding to this, the index is below the 20,100 and 200-day Simple Moving Averages (SMAs), explicit evidence of bears unchallenged strength in the broader scenario. 

Support levels: 103.30, 103.15, 103.00.
Resistance levels: 103.60 (200-day SMA), 104.00, 104.20 (100-day SMA)



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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