US Dollar struggles on Monday, quiet week ahead
- Market interpretation of Powell’s words indicates caution due to unpredictability of inflation trajectory.
- Friday’s Nonfarm Payrolls report showed a slowdown in annual wage inflation, fuelling predictions for imminent Fed rate cuts.
- NFP report also shows that job creation decelerated while unemployment rose.
The US Dollar Index (DXY) is currently trading near 105, reflecting mild losses in Monday’s session. Headwinds from persistent inflation that remains uncomfortably high, as stated by Federal Reserve (Fed) Chair Jerome Powell, hold the US Dollar steady. That being said, the weak jobs report released last Friday gave clues that the US economy might be signaling that the cooling down the Fed needs to start cutting rates has begun. This may trigger further downside for the USD.
The US economy presents a mixed picture with robust demand and a steady labor market, which saw some weakness in April. Fed Chair Powell’s cautious stance, noting the uncertainties surrounding future inflation trajectory and the substantial yet not guaranteed progress, might keep the USD afloat in case future data comes in hot.
Daily digest market movers: DXY starts the week on left foot as markets assess labor market data
- Nonfarm Payrolls in the US increased by 175K in April, underperforming market expectations of 243K.
- Unemployment Rate rose slightly to 3.9%, up from previous 3.8%.
- Average Hourly Earnings, a measure of wage inflation, declined to 3.9% from 4.1% on a yearly basis.
- Market expectations pivot toward a lower rate ahead of upcoming Fed meeting, with June rate cut odds holding firm at around 10%.
- However, for the later part of the year, expectations have increased with the odds for a July rate cut rising to 40% from a previous 25%, and almost 95% for a rate cut in September, up from 55% prior to the last meeting.
- Examining bond markets, US Treasury bond yields are down with the 2-year yield falling to 4.81%, the 5-year yield slipping to 4.48%, and the 10-year yield marginally lower at 4.49%.
DXY technical analysis: Dollar Index negatively sloping with bullish possibilities
The technical indicators on the daily chart reflect mixed signals for DXY. The negative slope and negative territory of the Relative Strength Index (RSI) indicate that bears seem to be gaining ground. This trend is further confirmed by the rising red bars of the Moving Average Convergence Divergence (MACD), which signals bearish momentum.
However, despite this negative environment, there are some bullish elements present as well. Notably, the DXY is currently positioned above the 100 and 200-day Simple Moving Averages (SMAs), which generally suggests a bullish trend in the longer term. Yet, it has temporarily fallen below the 20-day SMA, further emphasizing bearish short-term momentum.
In conclusion, the short-term technical outlook of DXY is bear-dominated, given the recent sell-offs and technical configurations. However, its position above the 100 and 200-day SMA underlines that the longer-term bullish momentum still has the potential to resume.
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.