US Dollar faced additional selling pressure, positive ISM PMIs helped
- A disappointing July jobs report sparked hopes of a September rate cut as well as recession fears.
- ISM Services data shows signs of improvement, overall economy remains strong.
- Market prices in 125 bps of Fed easing by year-end.
The US Dollar (USD), measured by the DXY index, came under initial selling pressure at the start of Monday's session but later erased losses after the release of positive ISM Services figures for July. The index initially fell to 102.20 but recovered to trade around 102.70.
Despite the positive data, the market’s fear is that the US economic outlook turned weak and investors worry that the US might be headed toward a recession.
Daily digest market movers: USD recovers after ISM Services data, markets worry about a recession in the US
- On the data front, the Services Employment Index climbed from 46.1 to 51.1 while the New Orders Index increased from 47.3 to 52.4.
- The Services PMI moved from contraction to growth, rising from 48.8 to 51.4.
- Soft US jobs data last Friday sparked fears that the Fed is lagging, leading to a global bond rally and equity sell-off on both Friday and Monday.
- The market is fully pricing in a 125 bps easing by year-end, with a 50 bps cut expected in September.
- A total easing of 225 bps over the next 12 months seems unlikely unless a deep US recession occurs. In that sense, it seems that markets are overreacting to one data point, and Fed speakers might cool down the dovish bets as the market has repeatedly misjudged the Fed's easing path throughout this cycle.
DXY technical outlook: Bearish bias persists, indicators now in oversold region
The DXY outlook turned bearish after the disappointing jobs report last week. The index fell below both the 20-day and 200-day Simple Moving Averages (SMAs). The momentum-based Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) also declined, indicating increasing selling pressure. The RSI below 30, however, indicates that a correction might be looming.
Supports: 102.50, 102.20, 102.00
Resistances: 103.00, 103.50, 104.00
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.
