US Dollar rises on hot inflation figures, hawkish bets

Inflation measured by the CPI in the US accelerated in March.
Following the hot figures, the odds of a rate cut in June plummeted.
Hawkish bets on Fed, soaring US Treasury yields benefit USD.
FOMC minutes saw officials concerned with sticky inflation.

The US Dollar Index (DXY) rallied to 105.20, up by nearly 1%, on Wednesday. The Greenback gained strength on hot inflation figures in the US Consumer Price Index (CPI) for March, which made markets start giving up hope for a June rate cut by the Federal Reserve (Fed).

Following a blockbuster labor market report and hot inflation figures for March, Fed officials may start signaling that they require additional evidence of the economy cooling down. In that sense, US Treasury yields may continue rising, which will benefit the USD.

Daily digest market movers: DXY gains strength on rising inflation figures, hawkish Fed bets

March CPI showed that headline inflation increased to 3.5% YoY in March, up from 3.2% in February and beating the 3.4% expected.
The Core CPI measurement, excluding volatile food and energy costs, reflected February's increase with an annual rise of 3.8% in March. Both the headline and core CPI experienced a 0.4% MoM rise, beating analyst estimates of 0.3%.
The odds of a Fed cut in June plummeted to 20%.
US Treasury bond yields rallied with the 2-year yield at 4.93%, the 5-year yield at 4.56%, and the 10-year yield at 4.51%. All three yields rose more than 2%.
FOMC minutes from March's meeting revealed uncertainty on inflation's persistence among the officials, but didn't provide any new insights on monetary policy.

DXY technical analysis: DXY bulls step in and recover ground

The technical indicators on the daily chart reflect that the buyers are gaining momentum. The Relative Strength Index (RSI) is on a positive slope, well within positive territory, which hints at underlying bullish strength. The Moving Average Convergence Divergence (MACD) follows suit with rising green bars, further validating the positive sentiment hovering over DXY.

Focusing on the Simple Moving Averages (SMAs), the DXY continues to be stationed above its 20, 100 and 200-day SMAs. This essentially suggests a higher ground captured by the bulls against the bears and adds weight to an overall positive prospect.

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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