US Dollar trims daily losses, focus shifts to NFPs on Friday

Higher-than-expected US Jobless Claims figures raised concerns over the US labor market.
Markets await Nonfarm Payrolls, Unemployment Rate, and Average Hourly Earnings on Friday.
The odds of a rate cut in June remain high.

The US Dollar Index (DXY) is mildly lower on Thursday and presently trading around 104. Mainly driven by weak weekly Initial Jobless Claims figures. The focus is set on Friday’s Nonfarm Payrolls where investors will get a clearer picture of the labor market.

The US labor market remains resilient despite the weak figures as well as the overall economy, with little signs of a slowdown. In case the economy doesn’t show conclusive evidence of cooling down, the Fed might consider delaying the start of the interest rate easing cycle.

Daily digest market movers: DXY extends losses on weak labor market figures

Weekly unemployment claims in the US reached 221K for the week ending March 30.
The reported claims exceeded estimates of 214K and surpassed the previous week's figure of 212K.
Following a slowdown in the US service sector, the Federal Reserve remains cautious but isn’t ruling out three cuts in 2024.
US Treasury bond yields show a slight rise with 2-year, 5-year and 10-year bonds standing at 4.68%, 4.34%, and 4.36%, respectively.
Investors await key labor market reports from the US, including March’s Nonfarm Payrolls, Unemployment Rate and Average Hourly Earnings data.
These reports will crucially impact the US Dollar as they shape expectations for the next Fed meetings.

DXY technical analysis: DXY displays mixed signals with bears’ tentative clawback

The indicators on the daily chart reflect a duel between the bulls and the bears. The Relative Strength Index (RSI) is on a negative slope but in positive territory, hinting that buying momentum is losing strength. However, it is not completely gone just yet.

The Moving Average Convergence Divergence (MACD) shows decreasing green bars, implying the potential for a bearish reversal, but it still needs to cross into negative territory for a credible sell signal.

Despite these bearish signals, the pair is comfortably placed above its 20,100 and 200-day Simple Moving Averages (SMAs), pointing out that the underlying trend remains in favor of the bulls.

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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