US Dollar adds gains on positive data
- Atlanta Fed President Bostic is cautious about rate cuts and prefers to see more data before easing.
- Revised GDP growth of 3% in Q2 highlights the resilience of the US economy.
- Jobless claims came in better than expected.
The US Dollar, measured by the US Dollar Index (DXY), saw further gains above 101.00 on Thursday. The 10-year US yield holds above 3.8%, supporting the Greenback. US stock index futures trade mixed following Nvidia earnings, which could impact risk appetite and the US Dollar’s demand as a safe-haven currency. On the data front, Gross Domestic Product (GDP) revisions highlight US economic resilience.
The US economy remains robust, exceeding expectations. However, market sentiment appears overly optimistic, with expectations of aggressive monetary easing.
Daily digest market movers: US Dollar extends gains after GDP revisions
- Atlanta Fed President Raphael Bostic, a leading FOMC hawk, expressed caution about imminent rate cuts, citing robust labor market conditions and elevated inflation.
- About 100 bps of easing is anticipated by year-end and 200 basis points over the following year.
- The odds of a 50-basis-point cut in September remain within the 30-35% range.
- Contrary to expectations, the Bureau of Economic Analysis revised Q2 annualized real GDP growth upwards to 3% from 2.8%.
- New unemployment insurance claims in the US declined slightly to 231K for the week ending August 23, marginally below market estimates.
DXY technical outlook: Index indicates potential recovery, resistance at 101.50
Indicators suggest a potential recovery for the DXY, with the Relative Strength Index (RSI) trending upward and the Moving Average Convergence Divergence (MACD) indicator printing lower red bars.
A consolidation above the 101.00 support level could trigger a rally. Key supports include 100.50, 100.30 and 100.00, while resistances are located at 101.50, 101.80 and 102.00.
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.