- The US Dollar trades firmly in the green after making new highs.
- Several central banks from G20 nations report this Thursday.
- The US Dollar Index prints a new six-month high and stretches further toward a new high.
The US Dollar (USD) is confirming its status as king and continues growing stronger as US Federal Reserve (Fed) Chairman Jerome Powell delivered what was expected: a hawkish pause. The devil was in the details in the US Dot Plot (Phillips curve), where the Fed remains above 5% for the better part of 2024. In the previous forecast, the Dot Plot showed rates between 4.5% and 5%. This surprise jacked up the 2-year US Treasury yield, which peaked at a 16-year high at 5.1973%. That news fuelled a rally in the Greenback.
Expect to see more volatility pick up this Thursday as a packed calendar for the US is not the only game in town. Five G20 central banks are set to issue rate decisions on Thursday. All eyes will be on Scandinavia, Switzerland, the United Kingdom and India as the most important ones. Expect to see some interesting moves across the markets, especially in the forex crosses where rate decisions will need to be digested and demand repricing.
Daily digest: US Dollar confirms as king
- At the start of the US trading session the Greenback is advancing against all major pairs. Certainly all the central banks that came out this morning see their currency getting substantially weaker against the US Dollar.
- Swedish Riksbank hiked 25 basis points as expected to 4% and saw some Swedish Krona strength rippling through in USD/SEK and EUR/SEK.
- The Swiss National Bank (SNB) kept its policy unchanged at 1.75% against the odds of hiking to 2%. The Swiss Franc gets hammered against the USD (USD/CHF) and EUR (EUR/CHF).
- The Norwegian central bank, Norges Bank, hiked as expected from 4% to 4.25%. The Norwegian Krone strengthens in USD/NOK and EUR/NOK.
- The British central bank kept its benchmark rate unchanged at 5.25%, where an increase to 5.50% was expected. Even the surprise uptick in recent inflation numbers made the BoE split over wether to hike. The knife edge vote came out at 5-4, in favor of a pause in stead of a hike. The split decision together with the unchanged stance makes the Pound Sterling fall near 0.70% against the US Dollar (GBP/USD).
- The job market is going strong with Initial Jobless Claims going from 220,000 to just 201,000. Continuing Claims head from 1,688,000 to 1,662,000.
- A bit less positive was the Philadelphia Fed Manufacturing Survey for September, which went from 12 to -13.5. Not only thus contracting, but quite a chunky bit lower from -1.0 expected.
- Existing Home Sales fall lower for August from -2.2% previous to -0.7%.
- The US Treasury at 15:30 GMT will auction a 4-week bill at a substantially higher rate after the Fed decision overnight.
- Equities are in the red across the board in a flight to safety. It makes sense that equities are on the back foot as higher rates means less money flowing into equities with funding costs rising again on the back of the US Fed rate decision.
- The CME Group FedWatch Tool shows that markets are pricing in a 68.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November. The last rate hike is expected for either December of January 2024.
- The benchmark 10-year US Treasury yield trades at 4.47%, which is a 15-year high. The whole US yield curve got propped up higher after the US Dot Plot revealed Fed officials see rates higher for longer in 2024.
US Dollar Index technical analysis: tenth weekly gain in the making
THe US Dollar breaks higher and prints another six-month high in the US Dollar Index (DXY). No yearly high just yet though, as 105.88 remains unthreatened for now. All other central bank decisions are no match for the Greenback and are being gobled up, fueling another firm rally for the DXY to head to 105.88.
The US Dollar Index (DXY) has edged up, reaching 105.68. Next level to beat is that March level of 105.88 and counts as a yearly high. Should the DXY close above the yearly high, expect the US Dollar to follow on with more bullish moves in the medium turn.
On the downside, the 104.44 level seen on August 25 kept the Index supported on Monday, halting the DXY from selling off any further. Should the uptick that started on September 12 reverse and 104.44 give way, a substantial downturn could take place to 103.04, where the 200-day Simple Moving Average (SMA) comes into play for support.
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.
Source: https://www.fxstreet.com/news/us-dollar-stays-firm-faces-five-g20-central-bank-announcements-this-thursday-202309211025