US Dollar finds a lift supported by rising US yields
- DXY Index rises decisively, trading with gains around 103.50 level above the 100-day SMA.
- US Retail Sales in the last month of 2023 rose higher than expected.
- Markets ease their dovish bets on the Fed for March and May FOMC meetings.
The US Dollar (USD) reached a notable stride, trading at 103.50 while confidently deflecting the pressures of the 100-day SMA. This robust stride has been primarily fueled by the strong US Retail Sales data from December and a notable rise in US Treasury yields, both of which show that markets are adjusting their bets on the Federal Reserve’s (Fed) rate-cutting timeline.
The resilient US economy, evidenced by the latest data, is making adjustments to the market's dovish bets, albeit odds for rate cuts in March and May still hover around 50%. In December, CPI inflation picked up, as well as the job creation pace and wages, while economic activity remains strong, which is making markets believe that the Fed might not consider cutting rates too soon.
Daily Digest Market Movers: US Dollar ascends, bolstered by strong Retail Sales from December
- December's Retail Sales reported by the US Census Bureau outperformed consensus, registering 0.6% growth versus the 0.4% forecast and 0.3% from the previous period.
- The Fed's Beige book report didn't trigger any movements on the Greenback. It stated that the majority of the twelve Federal Reserve districts reported little or no change in economic since the last release.
- An uptick was observed in US bond yields as 2-year, 5-year, and 10-year notes currently trade at 4.30%, 4.02%, and 4.09% (its highest since mid December), respectively.
- As per the CME FedWatch Tool, the odds of cuts for March and May eased, but they remain high at around 50%.
Technical Analysis: DXY bulls step in and regain the 100-day SMA but now must defend it
The indicators on the daily chart reflect a somewhat bullish bias. The Relative Strength Index (RSI) demonstrates a positive slope in positive territory, endorsing growing buying momentum. The Moving Average Convergence Divergence (MACD) shows rising green bars, indicating the continuance of upward traction in favor of bulls.
The position of the index regarding Simple Moving Averages (SMAs) reveals a mixed picture. The DXY is now positioned above the 20 and 100-day SMAs, an encouraging sight for the buyers. However, it remains below the 200-day SMA, suggesting an undercurrent of bearish sentiment. Despite the recent bearish movements, bulls appear to be gaining ground.
Support levels: 103.40 (100-day SMA), 103.00, 102.80, 102.50.
Resistance levels: 103.60, 103.80, 104.00.
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
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
