US Dollar sinks in US trading session with markets reading miss on PPI estimates as reason Fed rate cuts soon

The US Dollar takes a blow with a miss in PPI numbers.
Traders see tensions in the Middle East head an echelon higher with UK and US bombing Houthi rebels.
The US Dollar Index flirts with a break below 102.

The US Dollar (USD) is receiving quite the blow from the Producer Price Index (PPI) numbers. The numbers are in contradiction against the Consumer Price Index (CPI) numbers from Thursday where an uptick was noticed in the headline inflation. The current print in US PPI numbers is undershooting on nearly all estimates and reveals a bit of a gap on what the end consumer is paying versus what the actual producer is paying for it.

Meanwhile on the world stage all eyes are on the Middle East after a UK-US task force fired around 60 rockets on Houthi controlled installations in Yemen. Meanwhile Houthi rebels have issued warnings that retaliation will be iminent and will take place soon against any UK or US ship or entitity. Tensions are rising in the region yet again since December and have their repercuttions in the energy complex with both Crude ant Natural Gas jumping higher.

Daily digest market movers: PPI misused by traders to bet on rate cuts

Cleveland Fed member Loretta Mester already spoke overnight and dampened hopes for quick rate cuts by saying that March is off the table.
The UK and US have performed joint airstrikes on Houthi positions in Yemen. Houthi rebels said retaliation will be taking place soon.
Producer Price Index (PPI) numbers for December are still on their disinflationary track:
- Monthly headline PPI went from 0.0% to -0.1%, instead of the projected 0.1%.
- Yearly headline PPI went from 0.9% to 1.0%; where 1.3% was expected.
- Monthly core PPI remained unchanged at 0.0% against 0.2% uptick.
- Yearly core PPI declined from 2.0% to 1.8%, in stead of staying unchanged.
- The US Dollar is weakening on the back of this disinflationary report and is giving up all of its gains in the US Dollar Index (DXY).
Minneapolis Fed President Neel Kashkari is due to speak around 15:00.
Equity markets are not impressed and remain at small gains for European indices, while US futures are marginally in the red ahead of the US opening bell.
The CME Group’s FedWatch Tool shows that markets are pricing in a 95.3% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 4.7% expect the first cut already to take place.
The benchmark 10-year US Treasury Note holds near 3.96%, and is trading near the low for this week. The move comes as a surprise given the uptick in inflation.

US Dollar Index Technical Analysis: US outperforming turns out to be an issue

The US Dollar Index (DXY) is stuck in a rut, and is not going anywhere it seems, even with recent inflation numbers not providing fuel for the DXY to jump back above 103. From a pure technical point of view, lower lows are coming in, while a sort of floor is forming, pointing to a descending triangle. Pressure is building and once the floor, around 102 snaps, it seems a given that the DXY will tank towards 101.

The first level on the upside to watch is 102.70, which falls nearly in line with the trend line from the top of October 3 and December 8. If broken and closed above, the 200-day Simple Moving Average (SMA) at 103.43 comes into play. The 104.00 level might be too far off, with 103.63 (55-day SMA) coming in as the next resistance.

A rejection by the descending trendline will give fuel to Greenback bears leading to a further downturn. The line in the sand here is 101.74 – the floor which held halfway through December before breaking down in the last two weeks. In case the DXY snaps this level, expect to see a test at the low near 100.80.

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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