US Dollar recovers on quiet Monday
- US Dollar recovers after declining on Friday due to Powell’s dovish remarks.
- Markets anticipate 100 bps of easing by year-end and 200 bps total over the next 12 months.
- Focus turns to PCE data later this week.
The US Dollar, measured by the US Dollar Index (DXY), regained some ground on Monday, hovering around 101.00 after it had plummeting last week. Friday’s decline was attributed to Federal Reserve (Fed) Chair Jerome Powell’s dovish remarks at the Jackson Hole Symposium, hinting at a potential shift toward a looser monetary policy stance by the central bank. This, in turn, caused the 10-year US yield to dip beneath 3.8%, which weighed heavily on the USD.
Despite positive economic growth that exceeds expectations, the market’s eagerness for aggressive monetary easing appears misplaced. The current situation warrants caution, as the totality of data points toward a disconnect between economic fundamentals and market pricing.
Daily digest market movers: US Dollar remains vulnerable following Powell’s dovish remarks
- Markets digest Powell’s dovish Jackson Hole speech with further easing expected.
- Powell signaled a shift in Fed policy, stating that “the time has come for policy to adjust.”
- He also emphasized the importance of the labor market, noting an “unmistakable” slowdown.
- 100 bps of easing is predicted by year-end, with 200 bps total over the next 12 months.
- Odds of a 50 bps cut in September are 30-35%, contingent on upcoming data.
- Market participants await the August NFP report for further guidance on the Fed’s path.
- This Friday’s Personal Consumption Expenditures (PCE) figures from July will be key.
DXY technical outlook: DXY finds support, bullish momentum might build
The DXY index has found support at its lowest levels since December, indicating a temporary pause in selling pressure. The Relative Strength Index (RSI) remains deep in oversold territory, suggesting that there is potential for further upward corrective movements.
The Moving Average Convergence Divergence (MACD) is exhibiting steady red bars, aligning with the RSI and providing additional evidence of potential upward momentum as there is more room to correct. That being said, there are no clear signs of a reversal and the DXY is exposed for further downside.
Key support levels to monitor are 100.50, 100.30 and 100.00, while resistance levels to watch are 101.00, 101.50 and 101.80.
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.