US Dollar retreats as traders fear Yen interventions again
- The US Dollar eases with traders fearing impact when USD/JPY will hit 160.00.
- All eyes will be on US Q1 GDP and PCE data for May as focal points this week.
- The US Dollar index eases 0.25% with most of the European session done.
The US Dollar (USD) heading lower in the European trading session on Monday, with markets seeing headlines on the political difficulties around Europe fading into the background, ahead of Sunday's upcoming first round of elections in France. This means some fading in the safe-haven flows into the Greenback. Some counterweight, though, comes from the Japanese Yen (JPY), which is devaluing further against the Greenback and has the 160.00 level in reach, where the Ministry of Finance of Japan intervened last time.
On the economic data front, there are some lighter numbers to start the week with, such as the Dallas Fed Manufacturing Business Index for June. Besides that, the US Treasury is heading back to markets to allot some US debt while US Federal Reserve Bank of San Francisco President Mary Daly will close off this Monday with some comments.
Daily digest market movers: Here comes Dallas
- Chicago Fed President Austan Goolsbee said on CNBC that he is hopefull and is convinced next data points will be confident on inflation easing.
- The onshore Yuan weakend near 2%, which is the maximum bandwith the People's Bank of China (PBoC) allows for its currency to move in against the US Dollar in its onshore market.
- At 14:30 GMT, the Dallas Fed Manufacturing Business Index for June will be unleashed. Previous print was at -19.4, with no forecast available.
- The US Treasury is set to auction a 3-month and a 6-month bill at 15:30 GMT.
- At 18:00 GMT, Federal Reserve Bank of San Francisco President Mary Daly delivers remarks and participates in a Q&A session with Deidre Bosa, "TechCheck" Anchor at CNBC.
- Equities are starting to turn positive with in Europea green across the board, while in the US only the Dow Jones is positive.
- The CME Fedwatch Tool is backing a rate cut in September, with odds now standing at 59.5% for a 25 basis point cut. A rate pause stands at a 34.1% chance, while a 50-basis-point rate cut has a slim 6.4% possibility.
- The US 10-year benchmark rate is trading at 4.25%, rather steady since the end of last week.
US Dollar Index Technical Analysis: DXY in a tight spot
The US Dollar Index (DXY) is easing a touch on Monday, and while economic data will be very important again, as always, traders will need to have a hawkeye on the US Dollar against the Japanese Yen (USD/JPY) this week. With that forex pair trading near 160.00, markets are gearing up for possible intervention risk from the Japanese government. The last time the Japanese government intervened, the USD/JPY dove 5% lower, and the DXY dropped lower to 104.52.
On the upside, there are no significant changes to the levels traders need to watch out for. The first level to watch is 105.88, which triggered a rejection at the start of May and on Friday last week. Further up, the biggest challenge remains at 106.51, the year-to-date high from April 16.
On the downside, the 105.52 level is the first support ahead of the trifecta of Simple Moving Averages (SMA). First is the 55-day SMA at 105.20, safeguarding the 105.00 round figure. A touch lower, near 104.64 and 104.48, both the 100-day and the 200-day SMA form a double layer of protection to support any declines. Should this area be broken, look for 104.00 to salvage the situation.
Central banks FAQs
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%.
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.
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%.
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.
