US Dollar up ahead of Powell’s speech
- USD sellers take a breather after four sessions of losses.
- Markets digest weekly Jobless Claims and August PMIs.
- Rate cut expectations remain high ahead of Powell’s words on Friday.
The US Dollar (USD), measured by the US Dollar Index (DXY), indicated an incline above the 101.00 level during Thursday’s trading session. This occurs in a market environment, closely attending Chair Jerome Powell’s Friday speech, while markets assess the release of recent Jobless Claims and S&P PMIs.
While market sentiment regarding future monetary policy decisions remains quite consistent, the economic outlook of the US suggests continued growth above trend. This unveils that the market possibly is overestimating the pricing for an aggressive easing once again.
Daily digest market movers: US Dollars gains traction, investors eye Jackson Hole Symposium for direction
- Markets await fresh directions on Jerome Powell’s words at the Jackson Hole Symposium on Friday to get a confirmation on whether the Federal Reserve (Fed) will cut in September.
- The Minutes from July’s FOMC meeting were perceived as dovish, with several officials observing that recent progress on inflation and higher unemployment provides a feasible case for an interest rate range reduction of 25 basis points.
- The market still prices in 100 bps of total easing by year-end, but those odds will likely change after Powell’s directions.
- On the data front, the number of US citizens applying for unemployment insurance benefits rose by 232K in the week ending August 17, according to Thursday’s US Department of Labor (DoL) report.
- This figure was slightly above the initial consensus of 230K and exceeded the previous weekly gain of 228K.
- The August flash estimate for the US S&P Global Composite PMI slightly slipped to 54.1 from 54.3 in July.
- However, this outperformed market expectations of 53.5, indicating that the business activity in the US’s private sector continues to expand robustly.
- Concurrently, the S&P Global Manufacturing PMI plummeted to 48, illustrating ongoing contraction, while the Services PMI saw a minor rise to 55.2.
DXY technical outlook: Bearish momentum cools as the market recovers
DXY’s technical outlook sees a shift as the bearish momentum slows down, providing the market with a respite. Indicators took a hit this week with the Relative Strength Index (RSI) landing in oversold territory, though it’s recovering. The Moving Average Convergence Divergence (MACD) currently prints flat red bars, hinting at a flattening bearish momentum. Hence, the overall technical signals suggest that bears are recuperating after propelling the index to its lowest level in a year.
Support Levels: 101.50, 101.30, 101.20
Resistance Levels: 102.00, 102.50, 103.00
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.