- US Dollar price jumps higher across the board on Tuesday in European and US trading.
- The PBoC failed to fix its Yuan stronger, while European PMI data suggest contraction in the eurozone economy.
- The US Dollar Index consolidates above 104.00 and could post a new six-month high.
The US Dollar (USD) turns back to session’s high in a volatile few hours with comments from Russia and Saudi Arabia pushing Crude Oil prices higher. This, in a reverse correlation made the Greenback come off its high for this Tuesday. Meanwhile the headline news has been shrugged off and the US Dollarindex is back at session’s high for Tuesday.
There is a very light economic calendar this week. Nonetheless, every datapoint could add to the conviction that the US is actually the place to be in order to pursue that soft landing. One datapoint to watch will be Factory Orders at 14:00 GMT, which is expected to contract slightly and might cause some paring back of this US Dollar strength..
Daily digest: US Dollar back to session high
- Crude Oil jumps higher, and janked off some profit from the Greenback briefly in an inverse correlation this Tuesday. The sudden spike in Crude Oil prices comes on the back of a joint statement from Russia and Saudi Arabia not only extending, but expanding as well their earlier commitments for a supply cut.
- The People’s Bank of China (PBoC) tried to squeeze speculators in their Yuan currency by fixing it substantially lower. Markets shrugged off the strong fixing and devalued the Yuan substantially further against both the Euro and the US Dollar. .
- Factory Orders shrunk less than expected for the month of July: Previous number was 2.3% and the July number came in at -2.1%, above -2.5% expected.
- The US Treasury will be very active with three auctions on Tuesday: a 3-month, a 52-week and a 6-month Bill will be auctioned.
- Total Vehicle Sales data for August will come out at 19:30 GMT. Previous figure was 15.7 million.
- Equities present a red picture halfway through the European trading session, with the Chinese Hang Seng as the biggest loser, down 2.06%. European equities are in the red after EU PMI numbers pointed to a full contraction for the top five biggest economies in the EU bloc. US futures are heading lower as well on the back of the Russia-Saudi announcement on more and longer supply cuts.
- In the central bank interest rate differential between the Eurozone and the US, the projection of an additional hike by the ECB has been erased due to the downbeat PMI numbers. This made the Euro depreciate substantially against the Greenback.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 93% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September.
- The benchmark 10-year US Treasury bond yield trades at 4.21% and gapped higher at the opening bell in Asia after trading was halted on Monday for the US Labor Day holiday.
US Dollar Index technical analysis: double top
The US Dollar is the best performer in the class yet again as the summer rally is being extended in the US Dollarindex (DXY). It looks like the US and its Federal Reserve will be able to succeed in engineering a soft landing, whereas this is highly uncertain on the other side of the Atlantic Ocean. This makes the US Dollar more popular from an investment point of view.
The number to beat for the US Dollar Index (DXY) is 104.69 intraday, which is not far as the index already peaked at 104.66. So only a few cents to go and the DXY will be at a new six-month high. Next levels are at 105.23, the high of March 2022, making it an 18-month high. If the index reaches this last level, some resistance might kick in.
On the downside, the big 104.00 figure is vital to hold and keep the US Dollar Index sustained at these elevated levels. Some room lower, the 200-day Simple Moving Average (SMA) at 103.06 comes into play, which could bring substantially more weakness once the DXY starts trading below it. The double belt of support at 102.42, with both the 100-day and the 55-day SMA, are the last lines of defence before the US Dollar sees substantial and longer-term depreciation.
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-jumps-in-catch-up-after-lacklustre-monday-202309050917