US Dollar sideways to lower as traders are already planning next week’s Thanksgiving
- The Greenback opens higher this Friday and fails to hold on to gains.
- Traders can let the dust settle in a very light calendar ahead of the festivities next week.
- The US Dollar Index is steady above 104, though faces some pressure towards the weekend.
The US Dollar (USD) has given traders and markets a run for their money in this very volatile and nervous trading week. The main takeaway – and probably the main topic next week around the dinner table at Thanksgiving – will be the question of whether the US Federal Reserve is now truly done with hiking for the time being. Traders will get the chance to put all the pieces of the puzzle in place. The Greenback could possibly regain some strength, as this week’s move looks a bit overdone.
The calendar this Friday is a very slim one, with only housing data and building permits foreseen. Do not expect any big waves. The two actions that will probably guide the markets are a reduction of positions ahead of the weekend and some paring back of incurred losses in overdone and overstretched moves from earlier this week, in all asset classes.
Daily digest: US Dollar still faces selling pressure
- Thee sole data points for this Friday were housing data numbers:
- Monthly Building Permits for October went from 1.471 million to 1.487 million.
- Housing Starts for October went from 1.346 million to 1.372 million.
- Traders will try to assess this week’s data going into the year-end with the question of whether there is a medium-term goldilocks scenario, in which the Fed will cut quicker than expected (expectations now are for earliest June/July 2024). Or, alternatively, if there will be a recession in which economic growth gets slashed, jobless claims soar and more pain must be endured by the economy before the Fed steps in and starts cutting rates to provide ample oxygen for the US economy to recover.
- Some US Federal Reserve speakers are taking the stage late this Friday:
- Fed’s Mary Daly from the San Francisco Fed said she is not sure if inflation is on track for 2%.
- Michael Barr, the Fed’s Vice Chairman, said the Fed is very cautious on overinterpreting any data points and that the Fed is near its interest-rate peak.
- Equities are very mixed this Friday after a downbeat day across the board on Thursday. The Japanese indices are closing this Friday in the green, while the Chinese Hang Seng is down over 2%. European equities up nearly 1% with US equities still flat for this Friday’s session.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 99.8% chance –up from 85.7% on Tuesday morning – that the Federal Reserve will keep interest rates unchanged at its meeting in December.
- The benchmark 10-year US Treasury Note yield trades at 4.44%.
US Dollar Index technical analysis: US Dollar steady
The US Dollar is trying to continue its recovery from Tuesday’s meltdown. The recovery is not going as speedily as hoped, however, as only baby steps are visible in the US Dollar Index (DXY). It looks like traders have been unwinding their US Dollar long positions and only a substantial catalyst in favour of the Greenback will help to bring the DXY back to 105 and higher.
The DXY was able to bounce off the 100-day Simple Moving Average (SMA) in the late 103s. Now expect to see follow through from there, with 105.29, the low of November 6, as the market level where the DXY should try to close above this week. From there, the 55-day SMA at 105.71 is the next price point on the topside that needs to be reclaimed by US Dollar bulls before starting to think of more US Dollar strength to come into play.
Traders were warned that when the US Dollar Index would slide below that 55-day SMA, a big air pocket was opening up that could see the DXY fall substantially. This materialised on Tuesday. For now the 100-day SMA is trying to hold, at 103.62, although the 200-day SMA is a much better candidate for support. Should that level even be broken substantially, a long term sell-off could get underway with the DXY falling between 101.00 and 100.00.
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.