US Dollar steady as markets digest S&P Global PMIs
- US Dollar holds its ground on Monday, rising despite softer PMI data.
- Market prices in 75 bps of Fed easing by year-end.
- Fed’s Goolsbee pledged for “many cuts” will be needed next year.
The US economy is showing some signs of deceleration, but there are also some signs of the economic activity holding resilient. The Fed has stated that the pace of the easing cycle will depend on the incoming data.
On Monday, Fed’s Goolsbee stated that rates need to come down adding that “many more rate cuts” will be needed. On the other hand, Minneapolis Fed President Neel Kashkari stated that the Federal Reserve is still focused on data to guide its decisions while Bostic commented that the recent half-point rate cut doesn’t establish a pattern for future cuts, also noting that risks to the labor market have grown.
Daily digest market movers: US Dollar stays green after PMI data
- Composite S&P PMI expanded at a slower pace of 54.4 in September, down from 54.6 in August.
- Manufacturing PMI unexpectedly declined to 47.0, while the services PMI expanded at a better-than-projected 55.4.
- Market continues to veer toward a dovish Fed, pricing in 75 bps of easing by year-end.
- Traders will keep an eye on incoming Fed comments and if incoming data would justify a 50 or 75 bps cut.
- US Dollar is likely to remain vulnerable until the market reprices Fed expectations. Incoming data will be key.
DXY technical outlook: Bulls remain weak and go nowhere
The DXY index has shown some momentum, but indicators remain in a bearish zone. The Relative Strength Index (RSI) is at 40, indicating weak buying pressure. The Moving Average Convergence Divergence (MACD) is displaying diminishing green bars, further supporting the bearish trend.
Supports are located at 100.50, 100.30 and 100.00. Resistance levels are found at 101.00, 101.30 and 101.60. The DXY index is likely to face resistance at these levels if it continues to rise. Conversely, if it falls below the support levels, it could signal further weakness.
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.