US Dollar edged higher despite soft labor market figures, Fed remains cautious
- The DXY Index trading exhibits modest gains, rising to 104.45.
- Markets hope Fed announces early rate cut due to lower-than-expected CPI data.
- Weak Initial Job Claims, declining Philadelphia Fed Manufacturing support dovish rhetoric.
The US Dollar Index (DXY) is mildly trading up at 104.45 on Thursday as sellers seem to be consolidating the sharp downward movement from Wednesday's session.
The US economy is hinting toward a slowdown, evidenced by the unexpected Initial Jobless Claims rise and a Philadelphia Fed Manufacturing Survey contraction. Softer-than-expected inflation data reported on Wednesday supports this idea, which makes markets hope that the Federal Reserve (Fed) might consider rate cuts sooner rather than later, a thesis that weakens the USD.
Daily digest market movers: DXY under selling pressure as soft data warns markets
- Wednesday’s softer Consumer Price Index (CPI) indicates potential disinflation, which might speed up Fed's possible interest rate cuts.
- Initial Jobless Claims for the week ending May 3 rose to 222K, surpassing estimates. The figure for the previous week was also revised to a higher 232K.
- Philadelphia Fed Manufacturing Survey (an index assessing the state of manufacturing in Philadelphia) for May depicted a contraction to 4.5, underperforming market predictions.
- CME FedWatch Tool predicts about a 75% chance of reduced fed funds rate post-September meeting, up from pre-CPI expectations of 65%.
DXY technical analysis: DXY finds some light, outlook remains bearish
The Relative Strength Index (RSI) is sitting flat in negative territory on Thursday, indicating the weakening of the buying momentum. This means that, although demand is declining, the selling momentum isn’t getting any stronger. The Moving Average Convergence Divergence (MACD) is exhibiting flat red bars, which suggest a similar situation - neither the bulls nor the bears seem to have a strong grip over the price momentum presently.
Looking at the Simple Moving Averages (SMAs), the DXY is below the 20-day SMA, which spelled a short-term bearish tone. However, the fact that the index remains above the 100-day and 200-day SMAs might be signaling a protective floor ensured by the bulls.
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
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
