The US Dollar (USD) trades softer on Monday, slowly moving away from this Monday's low after the NY Fed Manufacturing Index turn positive. The move comes after traders seem to become increasingly convinced that the US Federal Reserve (Fed) will opt on Wednesday for a big interest-rate cut. This adds even more importance to the Fed meeting, where Fed Chairman Jerome Powell and his colleagues will need to make a decision on which is the right way to start the policy easing process: with a big or small rate cut.
On the economic data front, a slow start for the week in the runup to the Fed meeting on Wednesday. For Tuesday, the US Retail Sales data will be at the forefront in terms of market moving data. The NY Empire State Manufacturing Index for September was already an upbeat suprise for the start of this week by jumping to +11.5, coming from - 4.7 in August.
Whereas at the start of last week there were chances of the US Dollar Index (DXY) breaking above its upper band at 101.90, this Monday’s technical analysis needs to look at the possibility of the index snapping the lower band at 100.62. The seismic shift that some articles from the press and words from former NY Fed member William Dudley caused is leading to more downside pressure for the US Dollar as markets consider a 50 bps rate cut for both September and even for November. From a catalyst point of view, the current bandwidth should hold until the main event on Wednesday.
The upper level of the bandwidth for this week remains 101.90. Further up, a steep 1.2% uprising would be needed to get the index to 103.18. The next tranche up is a very misty one, with the 55-day Simple Moving Average (SMA) at 103.40, followed by the 200-day SMA at 103.89, just ahead of the big 104.00 round level.
On the downside, 100.62 (the low from December 28) holds strong and has already made the DXY rebound four times in recent weeks. Should it break, the low from July 14, 2023, at 99.58, will be the next level to look out for. If that level gives way, early levels from 2023 are coming in near 97.73.
US Dollar Index: Daily Chart
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.
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