US Dollar defies markets and pares back Monday's losses in full

The Greenback bounces off a one-month-low.
US yields steady at 4.85% ahead of big tech earnings.
The US Dollar Index breaks back above 106.

The US Dollar (USD) is flipping markets the middle finger in not a nice way this Tuesday. Just after the US opening bell, the US Dollar Index (DXY) performed that last few pips in order to all but fully erase the incured losses from Monday, when the US 10-year yield issued red flags by crossing over 5.0%. The US Dollar was proclaimed dead, though the current staggering recovery is rather proving the opposite.

On the economic data front, the Purchase Managers Index (PMI) numbers for October were an upbeat surprise for the US. Compared to the ones from Europe that came out earlier this Tuesday, it is yet again a telling sign that the EU bloc is struggling, contracting, stuck in the mud, while the US is nicely and smoothly having that soft landing. With PMI's even soaring back above 50, there is sign of further declines just yet in the US economic conditions.

Daily digest: US Dollar wipes out long EUR/USD bets

The US Redbook Index year-over-year came out at 5%, higher than the previous number at 4.6%.
The Philadelphia Fed Non-Manufacturing Activity tracker for October went from -16.6 to -20.3 and is shriking further to an almost one-year-low.
The Purchase Manager Index numbers for the US could not have come at a better time to support the recovery in the Greenback: Manufacturing for October went drom 49.8 to 50, beating estimates of 49.5. The Services Index went from 50.1 to 50.9, which is a pickup in activity, beating the foreseen contraction to 49.9. The Composite PMI went from 50.2 to 51.
Around 14:00 GMT, the Richmond Fed Manufacturing Index for October came out, heading from 5 to 3, where 8 was expected.
The US Treasury will try to auction a 2-year Note in the bond market.
Equities are in the green, though nothing convincing. In Asia none of the major indices is up over 0.50%. In Europea very mixed numbers as the European PMI numbers were better, but still in contraction below 50 on all components. US futures are rallying higher near 1%, with the Nasdaq leading the charge ahead of Microsoft and Meta earnings after the US closing bell.
The CME Group’s FedWatch Tool shows that markets are pricing in a 98.4% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
The benchmark 10-year US Treasury yield trades at 4.85% and briefly broke above 5.05% on Monday, a multi-year high. Although yields have retreated quite quickly, the fact that the pain threshold has been breached, could be a sign on the wall of more pain to come for the bond market.

US Dollar Index technical analysis: King Dollar roars

The US Dollar lost its status as King Dollar on Monday after US yields, specifically the US 10-year yield, broke above 5%. In financial markets often 5% is seen as the pain threshold where, once above, red lights will start to flash in terms of recession possibilities, shrinking economy and a stand still or contraction growth. Though the Greenback is not going quietly and fighting back, erasing all incured losses on the back of Monday's events.

In order to recover, the DXY needs to break back above 105.88 and preferably even break above the high of Monday at 106.33. Once that is the case, Dollar bulls are reassured that plenty of Greenback is in play and this correction was just a blip on the hot plate. On the high end 107.20 still remains the level to beat for the year.

On the downside, the recent resistance at 105.88 did not do a good job supporting any downturn and now completely has lost its importance. Instead, look for 105.12 to keep the DXY above 105.00. If that fails to do the trick, 104.33 will be the best level to look for resurgence in US Dollar strength, as it aligns with the 55-day Simple Moving Average (SMA) as a support level.

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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