US Dollar erases gains as European session nears opening bell

  • US Dollar reverses earlier gains and is fliriting with a break lower against its major peers.
  • Slow start of the week with some minor data points coming out.
  • The US Dollar Index consolidates above 102 and flirts with more upside potential.

The US Dollar (USD) drops back to flat as the the US session takes over on Monday, with all eyes on US inflation data later this week. Market participants last friday perceived the US jobs report as a sign that a pause is due for the Federal Reserve (Fed), pricing out a rate hike for the last quarter of 2023. As the dust settles, traders are back buying the Greenback as risk of sticky or higher US inflation could still be at hand, resulting in the US Dollar index peaking at an intraday high halfway through the European session. 

On the economic front, eyes are on the Consumer Credit Change for June, which should not be that market moving. The main focus later this week will be on the US inflation numbers in the Consumer Price Index (CPI). They will act as a catalyst to define whether a Goldilocks scenario is in play with solid employment while price pressures drop or if sticky inflation remains stubborn. The first scenario will back a pause by the Fed, while the last one will lock in another rate hike for the next policy meeting. 

Daily digest: US Dollar back to square one

  • With the US session coming in, the US Dollar retreats nearly in full and starts the US trading session nearly unchanged. 
  • New York Fed's John Williams comments that rates may come down next year. Meanwhile Morgan Stanley says markets should brace for disappointing US growth. 
  • The dust seems to settle this Monday as plenty of peaks from Friday after the US jobs report are being pared back partially. Investors are looking forward to the US inflation numbers later this week and are starting to pre-position for them. 
  • At 15:30 GMT the US Treasury is auctioning some debt on a 3-month and a 6-month tenure. With US bond yields on the rise this Monday, the auction could see some higher rates being demanded by investors. 
  • The European session will be closed already when the US Consumer Credit Change for June is due to come out at 19:00 GMT. Expectations are for a firm uptick in Consumer Credit from $7.2B to $13B. 
  • The Japanese Topix Index closed Monday positive up 0.40%, while European equities are struggling to tie up with gains. US equity futures though are painting another picture and are for now pointing to a green opening on Wall Street at the start of the week. 
  • The CME Group FedWatch Tool shows that markets are pricing in an 84.5% chance that the Fed will pause hikes at its meeting in September. The probability of a pause peaked on Friday to 87.0% and is now abating a little bit. 
  • The benchmark 10-year US Treasury bond yield trades at 4.08% and is recovering from the slide on Friday where it hit 4.20%  on the upside and got pulled back all the way to 4.03% in the wake of the US jobs report. A further recovery of the US Treasury note would go hand-in-hand with a stronger US Dollar.  

US Dollar Index technical analysis: Risk of more downside

The US Dollar retreats in full in the handover from the European to the US trading session this Monday. While the US Dollar Index (DXY) was up above 102.30 from 102, that gain is being erased at the US opening bell. The US Dollar Index from a technical point of view is at risk of starting the week with a rejection after trying to break above a key technical level and could spell trouble going forward if US Dollar bulls are unable to eke out gains at this Monday's session. 

For the upside, 102.32 is a key level to watch in the form of the 100-day Simple Moving Average (SMA). Even should the DXY be able to break and close above there, US Dollar bulls are not out of the woods yet, with the 55-day SMA just above there at 102.50. Two key levels need to be broken and closed above in order to avoid any large pullbacks before targeting 103 to the upside. 

On the downside, the US Dollar bears will defend that same mentioned 100-day SMA at 102.32 and try to stage a firm rejection. The uptrend from mid-July will be broken once bears can pull the price action below 101.74, which is the low of this past Friday. Once that unfolds, the probability of the DXY collapsing all the way back to sub-100 is quite large. 


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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