US Dollar extends gains as markets await fresh drivers


  • Durable Goods orders from February came in better than expected.
  • Housing data showed some signs of weakness.
  • PCE figures from February to be released on Friday will be the week’s highlight.

The US Dollar Index (DXY) is hovering around 104.20, trading with mild gains against its rivals on Tuesday. After Durable Goods and Housing market data, the USD remains stable as markets await fresh drivers to continue placing their bets on the next Federal Reserve (Fed) decisions.

The US economy is on a delicate path with inflation remaining sticky and economic activity showing some weakness. Jerome Powell confirmed the bank's persistence in not overreacting to hot inflation figures from the start of the year while the bank didn't change its interest rate projections from 2024. The start of easing is still seen starting in June, but incoming data will continue dictating the timing. 

Daily digest market movers: DXY mildly up ahead of PCE figures, markets digest mid-tier reports

  • The economic report by S&P Dow Jones Indices showed that the S&P/Case-Shiller Home Price fell by 6.6% on a yearly basis in January, slightly lower than expected.
  • The House Price Index reported by the Federal Housing Finance Agency (FHFA) in January saw a slight dip of 0.1% in the same month.
  • The US Census Bureau reported that Durable Goods Orders increased by 1.4% MoM in February, outperforming the consensus of 1.1% and showing a significant improvement from the previous drop of 6.9%.
  • The headline Personal Consumption Expenditures (PCE) is expected to have risen by 2.5% YoY, while the core measure is seen coming in at 2.8%. The outcome of the Fed’s preferred gauge of inflation will dictate the pace of the USD for the short term.

DXY technical analysis: DXY bullish momentum softens, outlook still bright

On the daily chart, the Relative Strength Index (RSI) paints a picture of flat momentum, suggesting a tie between buying and selling pressure. Simultaneously, the Moving Average Convergence Divergence (MACD) offers a flat trajectory with green bars, indicating a stagnation in buying power, which might be a sign of bulls taking a breather.

Despite the short-term sluggishness, the scene over a wider time horizon appears encouraging. The DXY is well-positioned above the 20, 100, and 200-day Simple Moving Averages (SMAs), a strong sign of the bulls' sizable control and an overall bullish tendency.

To add more context, the market is coming off a successful 1% winning week, which could explain the current pause in upward momentum. Traders could use this breather to re-assess the market and potentially find new entries for a continued bull trend. 

 

 

 

 

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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