US Dollar edges mildly lower, CPI looms

  • US Dollar slips slightly under impact of Jerome Powell’s fresh words.
  • Investors keenly await June’s CPI data release on Thursday for clear guidance.
  • If CPI comes in soft on Thursday, USD is poised for further downside.

On Thursday, Despite Powell’s cautious stance at his visit to the House Financial Services Committee, the US Dollar (measured by the DXY index) saw minor downturns and fell to 105.00. Powell’s reluctance toward immediate rate cuts and his hints at an ongoing assessment of data-driven indicators have kept the markets on edge.

Signs of disinflation in the US economic outlook have emerged, and the market confidence in the September rate cut remains strong. However, Federal Reserve (Fed) officials including Chair Jerome Powell continue to tread carefully, underlining their inclination toward data-dependent decisions rather than hastened action in implementing rate cuts.

Daily digest market movers: DXY down as markets continue assessing Powell’s sentiment

  • Highlight of Wednesday were the words of Fed ChairPowell to the House Financial Services Committee.
  • However, his testimony before the House did not provide any significant or fresh influences.
  • Powell expressed the need to be watchful over the labor market, noting visible softening in the sector.
  • He suggested that inflation might be moving toward lower levels but also mentioned his cautious optimism about it sustaining the 2% target. He also mentioned that he doesn’t hold a specific inflation number pertaining to decisions on future cuts.
  • Expectations from Thursday’s Consumer Price Index (CPI) continue to be significant. Projections depict the headline sinking two tenths to 3.1% YoY, while core inflation is expected to stay steady at 3.4% YoY.
  • Market sentiment indicates less than 10% chance of July rate cut, while betting odds for a September cut hover around 80%, according to the CME FedWatch Tool.

DXY technical outlook: Index sees some decline, DXY above 100-day SMA is a good sign

From a technical viewpoint, DXY seems to have slipped into a negative terrain, indicated by both the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) showing negative signs. Nevertheless, despite the minor setback on Wednesday, the DXY managed to stay above its 100-day Simple Moving Average (SMA), cushioning the impact of declines.

The subsequent support levels at 104.50 and 104.30 also continue to be staunch barriers against further drops. On the flip side, to regain momentum buyers must recover the 105.50 level to retest the 106.00 threshold.

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.