US Dollar rallies with US GDP and Durable Goods data signaling US economy in soft landing

The US Dollar in the green in the aftermath of the heavy data dump at 13:30 GMT.
Traders got little room to assess the numbers with ECB's Lagarde set to speak.
The US Dollar Index faces volalitity, though no realy breakout just yet.

The US Dollar (USD) is softening a touch, though very little, in the aftermath of the unchanged rate decision from the European Central Bank (ECB). The central bank remains data dependent and leaves no clues whatsoever on any possible rate cuts in the near future. Markets were bracing though for a communicated cut soon after ECB's Chairman Christine Lagarde said in Davos that a cut near the summer is reasonable.

On the economic front, traders are still going through the data dump from 13:30 GMT. The US Gross Domestic Product for the fourth quarter was an upbeat surprise against expectations. Even the Durable Goods saw an upward revision from its previous number, where the weather conditions are biting a bit into the current performance. Only let-down number seems to be the weekly Jobless Claims that picks up on both the initial and continuing number.

Daily digest market movers: US in soft landing path

The European Central Bank has released its statement where it said that it will keep its interest rates unchanged and it remains data dependent. A press release with Q&A by Christina Lagarde will follow suit near 14:45.
A bulk batch of data was released near 13:30:
- Weekly Jobless numbers:
  - Initial Jobless Claims went from 187,000 to 202,250.
  - Continuing Jobless Claims seen going from 1,806,000 to 1,833,000.
- US Gross Domestic Product numbers for Q4:
  - Headline GDP was seen last at 3.3% – heading to 1.5%.
  - Core GDP remained, as expected, stable at 2.0%.
  - Personal Consumption Expenditures slowed down from 2.6% to 1.7%.
  - Annualised Headline GDP went from 4.9% to 3.3%.
- US Durable Goods for December:
  - Orders headed from 5.4% to 0%
  - Orders without transportation soared from 0.4% to 0.6%.
Around 15:00 – at the same time as ECB’s Chairman Lagarde will be speaking – New Home Sales for December were released with a jump from 615,000 to 664,000, an upbeat number.
Near 16:00 the Kansas Fed Manufacturing Activity Index for January is to be released. Previous was at -4, with high expectations for a recovery seeing the upbeat PMI numbers from Wednesday where Manufacturing jumped back into growth, from 47.9 to 50.3.
The US Treasury Department is having a busy day allotting a 4-week bill near 16:30 GMT and a 7-year Note around 18:00 GMT.
Equity markets are in the green yet again with China roaring after the government has cut the Reserve Ratio Requirements (RRR) for banks, freeing up liquidity. Both the Hang Seng and the Shenzhen Index are up near 2.0%. European equities and US futures are stalling and are rather awaiting further data points.
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 jumped higher this Thursday morning to 4.16% and peaks for this week. In the aftermath of the data dump at 13:30 GMT, yields retreat a touch with the 10-year trading near 4.14%.

US Dollar Index Technical Analysis: Up, though not enough to move the market

The US Dollar Index (DXY) is, from a purely technical point of view, caught between two very important Simple Moving Averages. Those are the 55-day SMA near 103.17 and the 200-day SMA at 103.50, which acts as the floor and cap respectively. To make matters even worse, the floor (55-day SMA) is heading lower by the day, which opens up more downside than upside potential for the US Dollar in the near term.

Given the big batch of data released, with the possibility the ECB drops the ball in its communication, there remains still a case for the DXY to get through those two moving averages again and run away. Look for 104.41 as the first resistance level on the upside, in the form of the 100-day SMA. If that gets breached as well, nothing will hold the DXY from heading to either 105.88 or 107.20 – the high of September.

With the declining floor, more sell pressure could filter through into the price action. Price action could decline substantially should the US data release later this Thursday build a case for that move. 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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