US Dollar erases losses with upbeat PMI numbers

  • The US Dollar is in the red, though paring losses. 
  • Traders are going into risk-on mode with German and EU PMI numbers improving.
  • The US Dollar Index faces pressure on the 103-handle again.

The US Dollar (USD) is still in the red, though off this Wednesday's low. The sell off that occurred earlier is being partially erased due to upbeat surprises in all elements from the US Purchase Manager Index (PMI) numbers. This takes the wind out of the Euro against the US Dollar (EUR/USD), seeing a synchronised recovery between both nations. 

On the economic front, the main numbers for this Wednesday are now out of the way. All eyes on the US Gross Domestic Product numbers now on Thursday. Add in there the head of the European Central Bank (ECB) Christine Lagarde taking the stage to further speak about the rate decision which will take place on Thursday as well, and another volatile day could be in the making. 

Daily digest market movers: PMI upbeat surprise

  • German Purchase Manager Index numbers pumped up the Euro against the US Dollar. German Manufacturing went to 45.4, coming from 43.3. 
  • French Manufacturing PMI was an upbeat surprise as well, heading form 44.4 to 46.6.
  • The US Mortgate Applicatoins from the Mortgage Bankers Association has already been released and came in at 3.7%, from 10.4% last week.
  • Near 14:45 GMT S&P Global got released:
    • Manufacturing for January went from 47.9 to 50.3.
    • Services went from 51.4 to 52.9.
    • Composite number was at 50.9 and jumped to 52.3.
    • The US Dollar erases earlier losses against most major peers on the back of this number.
  • The US Treasury will place a 5-year Note in the market near 18:00. 
  • Equity markets are in the green after the positive evolution in the German and EU PMI numbers. All European indices are up over 1%. In the US Netflix released better-than-expected subscription numbers, which sent the Nasdaq soaring ahead of the US opening bell. 
  • The CME Group’s FedWatch Tool shows that markets are pricing in a 97.4% possibility for an unchanged rate decision on January 31, with a slim 2.6% chance of a cut.
  • The benchmark 10-year US Treasury Note snaps back above 4.10% after an earlier snap below, and trades at 4.14% at the start of the US trading session. 

US Dollar Index Technical Analysis: US PMI pushes back on calls to end the Greenback rally

The US Dollar Index (DXY) is down after Europe reported two upbeat numbers in the Manufacturing PMI print. Though the two European numbers are still in contraction, this does not mean the EU is out of the woods yet, or is outperforming the US. This afternoon’s US PMI numbers could either eke out more losses for the Greenback if the numbers disappoint, or send the Greenback back to its earlier level in Asian trading if they surprise to the upside. 

There are some economic data points that could still build a case for the DXY to get through those two moving averages again and run away. Look for 104.44 as the first resistance level on the upside, in the form of the 100-day SMA. If that gets scattered as well, nothing will hold the DXY from heading to either 105.88 or 107.20 – the high of September.  

A bull trap looks to be underway, where US Dollar bulls were caught buying into the Greenback when it broke above both the 55-day and the 200-day SMA in last week's trading. Price action could decline substantially and force US Dollar bulls to sell their positions at a loss. This would see the DXY first drop to 102.60, at the ascending trend line from September. Once below it, the downturn is open towards 102.00.

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.

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