US Dollar trades soft ad the end of the week, markets gear of for PCE data
- DXY Index is trading at 104.7, showcasing 0.35% losses but will close the week with mild gains.
- Durable Good orders from the US came in higher than expected but didn’t trigger movement from Greenback.
- Fed maintains cautious stance on premature easing, hinting at lower chances for swift interest rate cuts which cushions the USD.
The US Dollar Index (DXY) is currently trading at 104.7, experiencing some losses despite positive indications from the economy. This week, the US reported robust domestic economic indicators, such as the rising preliminary May PMIs reported by S&P Global, along with strong Durable Goods Orders and Jobless Claims figures, which suggest a potential continuation of the US Dollar’s recovery. Despite these fundamentals, the DXY Index faces resistance at the 20-day Simple Moving Average and feels the effects of selling pressure.
As the US economy displays robust indicators, the Federal Reserve’s (Fed) cautious stance on premature easing will limit any downward movement. Next week, April Personal Consumption Expenditures (PCE), the Fed’s preferred gauge of inflation, will be released and might change the stance of the central bank’s messaging.
Daily digest market movers: DXY sees red despite signs of economic resilience in the US
- Durable Goods Orders in the US increased by 0.7% in April after March’s figures were revised down steeply to 0.8%. April’s reading exceeded market predictions, which expected a drop of 0.8%.
- Excluding transportation, a 0.4% rise was recorded in new orders. With defense set aside, new orders stayed almost unchanged.
- Fed remains mindful of premature easing with Fed members implying that the policy rate limitation will continue for a prolonged period. Market probabilities for a rate cut in the upcoming meetings are around 50% in September and 85% in November, with a cut priced in by December.
DXY technical analysis: DXY faces strong resistance at 20-day SMA
The DXY’s technical outlook paints a mixed picture. The Relative Strength Index (RSI) is sloping downward within negative territory, hinting that selling momentum is underway. This negative slope implies bears gaining an upper hand in the short term. The Moving Average Convergence Divergence (MACD) displays flat red bars, which indicate steady buying pressure, adding more color to the bearish narrative.
Bulls, despite struggling, show their resilience as the DXY is clinging above the 100 and 200-day Simple Moving Averages (SMAs). This position above long-term averages indicates an underlying bullish bias. However, as long as it remains below the 20-day SMA, the short-term outlook will be painted with red.
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.