US Dollar goes nowhere as traders gear up for main event Thursday

The US Dollar is unchanged near the New York opening bell.
Very light data calendar points to a rather uneventful day in the wake of US inflation data on Thursday.
The US Dollar Index nudges lower, eyes key support test.

Filip Lagaart FXStreet

The US Dollar (USD) is trading sideways to slightly lower as markets are currently positioned within the eye of the data storm that will see wind speed peaking on Thursday with the US Consumer Price Index (CPI) numbers. A mix of events on Tuesday – with lackluster import/export data out China together with resparked recession fears, and the 40% tax on profits for Italian banks – served a risk averse cocktail which fueled the rally in the Greenback across the board in every major G10 pair. The very light economic calendar and the US Consumer Price Index (CPI) numbers on Thursday will see traders sitting on their hands for Wednesday in order to keep their powder dry for the main event.

On the economic front, a light release calendar is on the cards, with only the weekly Mortgage Applications numbers expected. From the commodity side, the US Energy Information Administration (EIA) will release Crude Oil and derivatives numbers. This release will get some additional attention as Western Texas Intermediate (WTI) crude price went on a wild ride on Tuesday, by first dropping 3.10% during the European session and then rallying 4% during the US trading session.

Daily digest: US Dollar calmness before the storm of Thursday

Markets faced the first and only piece of macroeconomic data out of the US at 11:00 GMT with the weekly Mortgage Bankers Association (MBA) Mortgage Applications dropping to -3.1% from -3.0% previous week.
The US Treasury Department is about to tap the markets for a 10-year note auction. As the 10-year tenor acts as an important benchmark, expect some additional attention to any bid/cover ratios and demanded yields.
Expect a bit of fireworks from the US Energy Information Administration (EIA) Crude Oil numbers. Western Texas Intermediate (WTI) crude price moved over 7% in intraday volatility on Tuesday, and as recession fears are fading on Wednesday, a drop in stockpile could fuel a pop higher in the Crude Oil price.
Stocks are rebounding a bit with the Hang Seng unchanged and European equities on the front foot. Both the German DAX and the European Stoxx 50 are paring back losses from Tuesday. US equity futures head slightly lower after a green opening after some disappointing earnings.
The CME Group FedWatch Tool shows that markets are pricing in an 86.5% chance that the Federal Reserve will pause interest rate hikes at its meeting in September.
The benchmark 10-year US Treasury bond yield trades at 4.01% and is trading higher after the drop below 4% intraday on Tuesday. The risk aversion from Tuesday seems to be in the rear mirror and US bonds are no longer heavily bid.

US Dollar Index technical analysis: nothing to see here

The US Dollar made it through a very difficult area on the US Dollar Index (DXY) chart. The region with both the 100-day and the 55-day Simple Moving Average (SMA) has been broken to the upside and must have hurt quite a few US Dollar bears in the process. With the US Dollar retracing a little bit on Wednesday, it will be important to see if the 100-day SMA at 102.31 will be able to refrain the DXY from paring back all gains from Tuesday.

For the upside, 102.45 – where the 55-day SMA is located – is the next key level to have a daily close above in order to advance in a solid way. The fact this technical indicator already got breached below means that it misses buying-interest. In case the US Dollar Index is able to head back above it, look for 103 and a new monthly high to be at hand.

On the downside, the US Dollar bulls will want to defend that earlier mentioned 100-day SMA at 102.31, in order to avoid a full paring back of earlier gains for this week. If bulls fail to do so, expect to see a nosedive move toward 102.00. The low of past Friday at 101.74 could be a line in the sand to predict if more downside is to come, once it is being tested.

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.

Author

Filip Lagaart

FXStreet

Filip Lagaart is a former sales/trader with over 15 years of financial markets expertise under its belt.

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