US Dollar plunges to multi-months lows on dovish Fed bets
- The US Dollar measured by the DXY Index plunges to a seven-month low amidst declining Treasury yields.
- Investors turn their gaze toward Powell’s forthcoming address at Jackson Hole for further cues on subsequent Fed rate cuts.
- A September cut is almost a done deal, based on interest rate bets.
The US Dollar, benchmarked by the US Dollar Index (DXY), recorded a seven-month low, in correspondence with a falling trend in Treasury yields and intense dovish bets on the Federal Reserve (Fed). In response to the circulating sentiment built around Chair Jerome Powell’s forthcoming statements at the Jackson Hole assembly that begins on Thursday, market investors are focusing on potential disclosures regarding future Fed rate cuts.
Despite this evolution, the US economic outlook remains resilient. Comprehensive scrutiny of recent data consolidates the fact that the US economy still persists in growing above its trend. This indicates a recurrent market narrative inclined toward the anticipation of aggressive loosening in monetary policy.
Daily digest of market movers: DXY Index reaches seven-month low ahead of Jackson Hole Symposium
- At the start of the week, the DXY Index has been recording a consistent fall, now at its lowest mark in seven months against all major global currencies.
- The US economy, in contrast, showcases stability with a benign rate of inflation and solid domestic demand.
- The marketplace, notwithstanding, speculates an imminent dovish spree by the Fed starting in September. Yet the non-aligned reality of the US economy and a hawkish stance from the Fed brings forth a potential resurgence opportunity for the DXY Index in future trade sessions. Jerome Powell’s words at the Jackson Hole Symposium will be key.
- While the odds of a sharp 50 bps cut in September have come down, the market still anticipates nearly 100 bps of total easing by year-end.
- This also extends to 175-200 bps of easing over the impending 12 months.
DXY technical analysis: Bearish dominance persists as DXY Index exits sideways movement
Despite continuous efforts by the buyers, the DXY’s technical outlook has assumed a clearer bearish shade. The DXY Index came out of its sideways trading phase in the band of 102.50-103.30, which is a likely windfall for sellers. The momentum-oriented Relative Strength Index (RSI) took a major hit, falling into the oversold terrain with the Moving Average Convergence Divergence (MACD) manifesting increasing red bars. This firmly suggests an entrenched bearish dominance toward the DXY.
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.