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US Dollar steady with markets having repriced already September for the initial Fed rate cut

  • The US Dollar locks in gains for this week after hotter-than-expected US CPI and PPI figures.
  • Traders are pushing the initial Fed rate cut towards September.
  • The US Dollar Index trades at a crucial pivotal level that could unlock 104.00.

The US Dollar (USD) trades in the green on Friday after markets got shaken on Thursday after a badge of US economic data suggested inflation pressures are far from over. A textbook panic attack took place in markets, with risk assets such as equities and Bitcoin selling off, yields jumping higher with bonds being sold and the US Dollar strengthening against everything. The surprise uptick in the Produce Price Index (PPI) numbers spooked investors, who rushed to reprice the first interest-rate cut by the Federal Reserve (Fed) away from June and towards September. 

On Friday’s economic calendar, there are some lighter data set to be released. Still, many investors will be set to square their positions for this week ahead of the US Federal Reserve rate decision next week and the risk event of the Bank of Japan, which could opt for hiking interest rates for the first time in decades. For this Friday, the Import and Export prices data and the preliminary data from the University of Michigan Consumer Sentiment and Inflation Expectations for March did not hold any surprises big enough to move the needle for this week. 

Daily digest market movers: Pressure for next week

  • At 12:30, Import and Export price data for February will be released:
    • The monthly Import price Index  headed from 0.8% to 0.3%, while the Yearly Import Index fell by 0.8% in January.
    • The monthly Export price Index declined  from 0.0% to 0.8%. The Yearly Export Index fell by 1.8% in January.
    • The New York Empire State Manufacturing Index for March did a nosedive move from -2.4 to -20.9. 
  • At 13:15 GMT, both Industrial Production and Capacity Utilization data for February were released. Production remained roughly stable, from -0.5% to 0.1%. Capacity Utilization was unchanged at 78.3%.
  • The last data number for this Friday, the University of Michigan was released at 14:00 GMT:
    • Consumer Sentiment for March came in a little bit lower from 76.9 to 76.5
    • Inflation expectations were at 2.9% in February, which is unchanged.
  • Equities are carefully in the green after the bloodbath on both the European and US equity markets. European indices are though mildly in the green while US futures are flat ahead of the US opening. 
  • According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the March 20 meeting are at 99%, while chances of a rate cut stand at 1%.  The odds of a June rate cut are around 60%, below the above 70% priced in a week ago. 
  • The benchmark 10-year US Treasury Note trades around 4.32%, the highest level this week.

US Dollar Index Technical Analysis: Repricing already done

The US Dollar Index (DXY) –not Elvis Presley of course – made its way back to the stage on Thursday after markets got shaken with the US Dollar as the sole winner. Although the PPI numbers might have sparked some worries on the June timing, it is again a mere repricing, by moving the probability for that initial rate cut from June to September. It is the same story we have seen year-to-date, which means that the probability of the DXY falling back to 103.00 is substantially bigger than rallying back up to 104.00.

On the upside, the 55-day Simple Moving Average (SMA) at 103.42 is facing some pressure. Not far above, a double barrier is set to hit with the  100-day SMA near 103.68 and the 200-day SMA near 103.70. Depending on the catalyst that pushes the DXY upwards, 104.96 remains the key level on the topside. 

As mentioned in the opening paragraph on technical analysis, the move from Thursday already covers that pushback of a rate cut to September, and a move further down the line to December looks very unlikely. More downside thus, looks inevitable once markets move forward again to the June probability,  with 103.00 and 102.00 up next, which bears some pivotal relevance. Once through there, the road is open for another leg lower to 100.61, the low of 2023.

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.