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US Dollar rallies after PMI’s reveal more hot inflation to come in

  • The US Dollar recovers on Thursday after its brief moment of weakness on Wednesday. 
  • Traders see PMI numbers contradicting Fed’s outlook. 
  • The US Dollar Index fell to the lower end of 103.00 before staging a rebound. 

The US Dollar (USD) soaring back higher, snapping the decline after markets got caught by surprise on Wednesday when the release of the Fed monetary policy decision revealed that the Federal Open Market Committee (FOMC) is still committed to cut interest rates three times this year. Markets had already repriced their stance to just two cuts ahead of the Fed event. The repricing of the Fed statement resulted in ample US Dollar weakness, with equities rallying substantially higher. 

On the economic data front, Thursday’s points are not a welcome note for the Fed officials. The recent print from S&P Global on its Purchase Managers Index (PMI) numbers shows not only an uptick in activity, but an uptick in prices paid as well. This will add to more inflationary pressures, which was not what the Fed had foreseen in its statement on Wednesday. 

Daily digest market movers: PMI points to inflation buildup

  • The Swiss National Bank (SNB) has cut its interest rate by 25 basis points from 1.75% to 1.50%. The Norwegian Norges Bank kept rates unchanged at 4.50%.The Bank of England is keeping its policy rate unchanged as well, seeing it too early to cut just yet.  
  • Thursday’s US economic data releases started at 12:30 GMT with a mixture of data:
    • Current Account data for Q4 headed from a revised up $196.4 billion deficit to 194.8 billion. .
    • The Philadelphia Fed Manufacturing Survey for March came out higher than expected, though still below the previous 5.2, at 3.2.
    • Initial Jobless Claims for this week came in at 210,000, coming from 212,000.
    • Continuing Jobless Claims headed  a little bit higher from 1.803 million to 1.807 million. 
  • S&P Global has released its preliminary Purchasing Managers Survey for March:
    • The Services PMI declined from 52.3 to 51.7.
    • The Manufacturing PMI soared from 52.2 to 52.5.
    • The Composite PMI was at 52.5 in February, and came in a touch softer at 52.2.
  • At 14:00 GMT, Existing Home Sales data will come in, with a small retreat from 4 million to 3.94 million expected.
  • Federal Reserve’s Vice Chair for Supervision Michael Barr will speak around 16:00 GMT.
  • Equities are holding on to overnight gains and are advancing further. Japan and China saw all their major indices close off with more than 1.5% gains. European equities are steady just below 1% and US equity futures are seeing the Nasdaq leading the charge by soaring near 1% ahead of the US opening bell. 
  • According to the CME Group’s FedWatch Tool, expectations for the Fed’s May 1 meeting are 91.5% keeping the rate unchanged, while chances of a rate cut are at 7.5%.
  • The benchmark 10-year US Treasury Note trades around 4.28%, back the earlier level from this week.

US Dollar Index Technical Analysis: Even data contradicts the Fed

The US Dollar Index (DXY) is turning into a snooze fest after the Fed meeting on Wednesday. The DXY is jumping this Thursday, partly erasing the losses from Wednesday after markets repriced again to three cuts. Traders should be very well aware that entering a trade in US Dollar means tighter entries and stop losses as volatility in the past three months (January 2024 to March 2024) was only around 6.5%, less than  the 14% seen in the three months before (September 2023 to December 2023)

The DXY is on track to break back above the 200-day Simple Moving Average (SMA) at 103.70 before moving back above 104.00. On the upside, 104.96 remains the first level in sight. Once above there, the peak at 104.97 from February comes into play ahead of the 105.00 region with 105.12 as the first resistance. 

Support from the 200-day Simple Moving Average (SMA) at 103.70, the 100-day SMA at 103.54, and the 55-day SMA at 103.53, fell short of providing enough cushion during the Fed meeting.  The 103.00 big figure looks to be rather a level to focus on for future reference when the DXY tanks. In case 103.00 does not hold, 102.48-102.35 comes in with the low of March as a level to watch. 

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.