- The DXY Index is mildly up on Monday’s session.
- No relevant data was released during the session and American traders celebrate Presidents’ Day.
- The FOMC January minutes will be the week’s highlight.
The US Dollar (USD) measured by the Dollar Index (DXY) stands neutral around 104.30 with American traders on the sidelines celebrating the US Presidents’ Day and markets digesting the Producer Price Index (PPI) data from last Friday.
Amid rising headline and core PPI, the US Dollar Index may see further upside as the hot inflation figure from January may cause the Federal Reserve to retain a cautious stance and. This week’s focus will be on the Federal Open Market Committee (FOMC) minutes, and several Federal Reserve (Fed) officials will be on the wires in the next few sessions.
Daily digest market movers: The US Dollar stands flat as markets digest last week’s data
- Last week, the US reported that Retail Sales and Industrial Production declined in January.
- The PPI from the same month, however, came in higher than expected.
- Markets await fresh drivers to continue timing the start of the Fed’s easing cycle. FOMC’s January meeting minutes are due on Wednesday.
- With eyes on the Federal Reserve’s next steps, the drop in odds for a March cut to 20% as per CME FedWatch Tool is a significant shift. The probabilities of a cut in May stand at 33% as markets seem to have pushed the start of easing to June.
Technical analysis: DXY bulls struggle to gain ground, must defend 100-day SMA
On the daily chart, the Relative Strength Index (RSI) is exhibiting a flat position within positive territory. This signifies that the buying momentum in the market is slowing and a balance is being achieved between the buying and selling forces. However, this flat position might also mean that the bulls are taking a breather after a strong run.
The Moving Average Convergence Divergence (MACD) histogram shows decreasing green bars. This indicates that bullish strength is losing steam and that bears might soon gain the upper hand. While bullish momentum is slowing, it doesn’t illustrate a full-blown bearish takeover but rather a weak bearish bent.
On a broader scale, the Simple Moving Averages (SMAs) are giving a brighter picture. With the index trading above the 20, 100 and 200-day SMAs, it suggests that the bulls have managed to remain in control over longer periods.
However, the prevailing dynamic suggests that bulls are struggling to gain further ground. This corroborates the MACD and RSI signals pointing toward decelerating buying momentum. Thus, in the short-term, sellers may have the upper hand, giving way to a potential bearish tilt in the market, while the long-term outlook remains positive.
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-trades-neutral-while-the-us-commemorates-presidents-day-202402191750