- The DXY Index recovered from a daily low of around 102.20 to trade flat on the day.
- ADP Employment Change figures from December came in better than expected. Weekly Jobless Claims were also positive.
- Weak S&P Global PMI data may limit the upside for the USD.
- Dovish bets on the Federal Reserve (Fed) eased somewhat but are still high.
The US Dollar (USD) gained traction during the American session, with the Dollar Index (DXY) trading at 102.45 after an initial dip to 102.20. That trend was primarily driven by favorable ADP Employment Change for December and Initial Jobless Claims figures, which added traction to the Greenback's daily movements.
With the Fed's recent judgment over the easing of inflation, there's a perception of a dovish stance as officials anticipated no rate hikes in 2024 with a possible easing of 75 bps. Current market bets suggest that investors are seeing higher odds of cuts in March and May, but those bets eased somewhat in the last sessions, which gave the US Dollar traction. Upcoming December labor market reports could shift expectations.
Daily digest market movers: US Dollar strengthens on strong labor market figures
- US Initial Jobless Claims were reported lower than expected at 202K vs the consensus of 216K for the week ending on December 30.
- The ADP Employment Change, which is a gauge of employment in the private sector, overshot estimates, coming in at 164K in December vs the 115K expected.
- The S&P Global Composite PMI from December came in at 50.9, lower than the 51.00 expected.
- On Friday, Nonfarm Payrolls, Average Hourly Earnings, and the Unemployment Rate for the last month of 2023 will be closely watched.
- The US bond yields are edging upwards. The 2-year yield is at 4.38%, the 5-year yield is at 3.97%, and the 10-year yield is at 4.00%.
- CME FedWatch Tool shows that markets have priced in a hold in the upcoming January meeting with 15% odds of a rate cut. However, markets are pricing higher odds of rate cuts in March and May 2024.
Technical Analysis: DXY bulls hold momentum but still have some work to do
The indicators on the daily chart reflect that DXY bulls are gaining ground. The positive slope and positive territory positioning of the Relative Strength Index (RSI) suggest that buying momentum is prevailing. Further backing this is the Moving Average Convergence Divergence (MACD) showing green bars on the rise, which further underscores the growing strength in the buyers' camp.
In contrast, the index's positioning with regard to the Simple Moving Averages (SMAs) offers a mixed outlook. The index stays above the 20-day SMA, highlighting the short-term buying momentum, but it is still below both the 100 and 200-day SMAs. This indicates that bears are trying to maintain a foothold in larger time frames. Still, their hold appears to be weakening, especially in the short term.
Therefore, while the long-term trend might favor bears, the short-term analysis indicates stronger upside momentum steered by the bullish camp — with both the RSI and MACD affirming this assertion.
Support levels: 102.20 (20-day SMA),102.00, 101.50.
Resistance levels: 102.70, 102.90, 103.00.
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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