US Dollar holding for now as the US session is just around the corner
- US Dollar tries to snap losing streak as Greenback trades in the green.
- All eyes on Michigan Consumer Sentiment to see if the US Dollar can close this week off the lows.
- The US Dollar Index consolidates below 100.00, a weekly close above there would offer relief.
The US Dollar (USD) is trying to claw back at the end of a hectic week where the Greenback was unable to catch a breather during the relentless selling waves. At one point it appeared that everything was against the USD, with several inverse correlations kicking into gear. Most notable element is that the stock market has rallied throughout the week which puts a goldilocks scenario on the table where US rates will keep abating, stocks keep rallying and the Greenback will be left behind paying the bill for it all by devaluing even more.
On the economic front, just one really important element to look for which could make or break the small recovery seen in the US Dollar in the European trading session. The University of Michigan Consumer Sentiment could either offer some relief or trigger another round of US Dollar selling and could push the US Dollar Index further below 100.00, making it the worst week since November 2022. The inflation expectations component in the Michigan survey will be crucial as a possible catalyst.
Daily digest: US Dollar calling end of the line
- Correlations look a bit broken this Friday as the US session is about the start with the European session starting its last few hours for the week. While the US Dollar is holding up quite well, equities are popping higher and US treasury yields are sliding to session’s low.
- Early on Friday, Christopher Waller from the Federal Reserve Board of Governors reiterated that the Fed needs to keep on fighting inflation and needs to keep policy restrictive for some time.
- The Japanese Yen deserves a moment in the spotlight as the Japanese tiger roars back by hitting an eight-week high against the Greenback.
- At 14:00 GMT, the only important datapoint for this Friday to keep an eye on as the Michigan Consumer Sentiment Index for July will be published. The index itself is expected to rise from 64.4 to 65.5. As such, that number should not have that much market-moving effect. Traders will rather look for the inflation expectations on both short and long term to be more impactful for the US Dollar Index to move higher or to make a new low for this week.
- Equities across the globe are taking it easy this Friday with some very mild losses at -0.17% for the Japanese Topix and the Chinese Hang Seng closed at +0.33%. For the latter, some negative news came as China vows to only provide support packages for specific segments and in the global economy, but no real large support package or quantitative easing is to be in place.
- European and US equity futures are flat for this Friday halfway through the European session. Although the goldilocks scenario might be the talk of the town, the earnings season could throw a spanner in the works for that straight line up to a new all time high.
- The CME Group FedWatch Tool shows that markets are pricing in a 94.9% chance of a 25 basis points (bps) interest-rate hike on July 26. A second rate hike looks to be out of the question judged on the very low percentages that scenario receives for the last Fed meetings later this year.
- The benchmark 10-year US Treasury bond yield trades at 3.76% and is continuing its relentless slide lower from 4.09% last week. Traders are going all-in on the goldilocks scenario where the Fed is done hiking and might even cut rates earlier as foreseen, which would see a massive boom in the economy and stock market.
US Dollar Index technical analysis: the close will be vital for next week
The US Dollar is having its worst week since its sharp correction in November last year as the Greenback is starting to bottoming out as the European trading session sees the US session joining soon. With substantial losses against the Japanese Yen (USD/JPY), Euro (EUR/USD) and Swiss Franc (USD/CHF), the US Dollar Index has lost nearly 2.5% of its value this week. As the DXY has retreated below 100.00, a weekly close above the big figure could spark hopes for the Greenback to still be able to pair back some of the losses.
In such an upside case, look for 102.73 to provide resistance at the 55-day Simple Moving Average (SMA) that will partially re-gain its importance after having been chopped up that much a few weeks ago. Only a few inches above the 55-day SMA, the 100-day SMA comes in at 102.82 and could create a firm area of resistance in between both moving averages. In case the DXY makes its way through that region, the high of July at 103.57 will be the level to watch for a further breakout.
On the downside, the US Dollar bears will look to take price action toward 99.42 as the next important technical support and once tested, that would mean a new 18-month low for the DXY. Just below there, on the weekly chart, we can find the 200-day SMA at 98.25, which is the next vital level to halt any selloffs. Although the price action resides below 100.00, a small turnaround could still be in the cards.
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.