- The US Dollar trades sideways against its most major peers on Tuesday.
- Markets are going back into risk-on, picking up the drive from past Friday, as tensions in the Middle East ease somewhat.
- The US Dollar Index trades sideways, just below 101.00.
The US Dollar (USD) is not breaking any pots this Tuesday after it made a short recovery on Monday after its stellar decline last week. The US Dollar was up against most major Asian currencies such as the Japanese Yen (JPY) and the Korean Won (KRW), though sees these gains being retraced in the US trading session. The risk-on mood seems to have returned to markets – with equities in the green across Asia, Europe, and US futures – as safe-haven flows retreat amid easing hostilities in the Middle East.
On the US economic calendar front, the Housing Price Index for June did not bring any substantial change. It becomes clear that the housing market is in a soft decline, but is far from crashing. All eyes will now be on the Consumer Confidence for August, a leading indicator.
Daily digest market movers: Consumer Confidence pops
- The US session kicked off with the Redbook Index for the week ending August 23.The previous reading was at 4.9% with 5% for the most recent number.
- The Housing Price Index came in a touch softer at -0.1% for June, while the previous number showed prices remained unchanged.
- At 14:00 GMT, the Consumer Confidence Index for August came in at 103.3, substantially than the 100.3 previously and even above the higest estimate of 103.00.
- Also at 14:00 GMT, the Richmond Fed Manufacturing Index for August dipped further from -17 to 1-19.
- Equities are having a change of heart with US equities heading into minor losses.
- The CME Fedwatch Tool shows a 71.5% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 28.5% chance for a 50 bps cut. Another 25 bps cut (if September is a 25 bps cut) is expected in November by 50.2%, while there is a 41.3% chance that rates will be 75 bps (25 bps + 50 bps) below the current levels and a 8.5% probability of rates being 100 (25 bps + 75 bps) basis points lower.
- The US 10-year benchmark rate trades at 3.85%, a fresh weekly high.
US Dollar Index Technical Analysis: Looking for clues and pivotal points
The US Dollar Index (DXY) saw a substantial move lower last week, snapping several important support levels, as markets are pricing in aggressive Fed rate cuts by November. The recovery from Monday was already a good start, seeing that markets might have exaggerated their assumption on how big and how many cuts the Fed will actually perform. However, the DXY has not been able to recover that much, which means incoming data will become pivotal. Any strong data might trigger a tipping point that could fuel a rally in the DXY if markets start to price out cuts.
For a recovery, the DXY faces a long road ahead. First, 101.90 is the level to reclaim. A steep 2% uprising would be needed to get the index to 103.18 from the current 101.00. A very heavy resistance level near 104.00 not only holds a pivotal technical value, but it also bears the 200-day Simple Moving Average (SMA) as the second heavyweight to cap price action.
On the downside, 100.62 (the low from December 28) tries to hold support, although it looks rather feeble. Should it break, the low from July 14, 2023, at 99.58 will be the ultimate level to look out for. Once that level gives way, early levels from 2023 are coming in near 97.73.
US Dollar Index: Daily Chart
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.
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