US Dollar pops as Chicago PMI beats estimates and jumps out of contraction

Most Recent Article : US Dollar gains ground on the back of US PCE inflation figures, rising US yields

The Greenback trades in the green against all major currencies.
US traders are seeing PCE confirming sticky pace of inflation.
The US Dollar Index climbs above 103 and could still flip this week’s overall performance into positive territory.

The US Dollar (USD) bulls are being back by Wednesday and Thursday's data points, confirming that the US economy is not dead just yet; and that inflation is not coming down that quickly as expected. With the Personal Consumption Expenditures, the preferred inflation gauge from the US Federal Reserve, traders got a look under the hood on what US inflation is doing. It is a much-telling tale of two speeds where cleary European inflation is almost free-falling, while US inflation is rather sticky and only goes down in babysteps.

On the economic front, all, or at least most important datapoints are behind us for this Thursday. The fact that nearly all PCE elements, both Headline and Core Expenditures fell in line of expectations, shows that the Fed is still right to say that inflation is a force to be reckoned with. The Initial Jobless Claims back that view as no major uptick in unemployment is being noted for this week.

Daily digest: Chicago PMI upbeat surprise

At 13:30 GMT, this Thursday a big batch of data points was released:
1. US Initial Jobless Claims are expected to head from 211,00 to 218,000.
2. Continuing Jobless Claims were at 1,840,000 and went to 1,927,000.
3. Monthly Headline Personal Consumption Expenditures Price Index for October went from 0.4% to 0%.
4. Headline Personal Consumption Expenditures Price Index on a yearly basis went from 3.4% to 3%.
5. Monthly Core Personal Consumption Expenditures Price Index for October went from 0.3% to 0.2%, as expected.
6. Core Personal Consumption Expenditures Price Index on a yearly basis went from 3.7% to 3.5%, as well as expected.
7. Personal Income for October went from a revised down 0.4% to 0.2%.
8. Personal Spending for October went from 0.7% to 0.2%.
San Francisco Fed official Mary Daly said she is not thinking about rate cuts any time soon. More hikes might be needed in inflation asks for it.
Additional comments from Fed's John Williams from teh New York Fed, saying that keeping rates restrictive is the best plan going forward for some time.
The Chicago Purchasing Managers Index jumped from 44 to 55.8, which is out of contraction and an upbeat surprise from the 45.4 estimate.
Pending Home Sales index for October declined from 1% to -1.5% agains the previous month.
Right at the end of this Thursday, the US Treasury is heading to markets to allocate a 4-week bill.
Equities are on track to print one of the best performing November in a long time. Euroepan equities are comfortable in the green, with US equities near session highs.
The CME Group’s FedWatch Tool shows that markets are pricing in a 95.8% chance that the Federal Reserve will keep interest rates unchanged at its meeting in December.
The benchmark 10-year US Treasury Note trades at 4.32%, and is finding a floor after the earlier decline this week.

US Dollar Index technical analysis: DXY can still close in the green for this week

The US Dollar has been stretched long and far enough in its devaluation – like an elastic band. Earlier this week the Relative Strength Index (RSI) was indicating that the elastic band was overstretched to the downside after entering oversold, and some unwinding was granted. The unwinding is starting to take place and could still put this weekly performance of the US Dollar Index (DXY) in the green if the current trend continues into Friday’s US close.

The DXY is making its way up towards the 200-day Simple Moving Average (SMA), which is near 103.59. The DXY could still make it back up there, should US traders come back in the market and start buying the current dip. A two-tiered pattern of a daily close lower followed by an opening higher would quickly see the DXY back above 104.28, with the 200-day and 100-day SMA turned over to support levels.

To the downside, historic levels from August are coming into play, when the Greenback summer rally took place. The lows of June make sense to look for some support, near 101.92, just below 102. Should more events take place that initiate further declines in US rates, expect to see a near full unwind of the 2023 summer rally, heading to 100.82, followed by 100.00 and 99.41.

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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