- The US Dollar extended Tuesday’s impressive gains, but the upward momentum is somewhat weak.
- The United States reported positive housing market data.
- The 5- and 10-year US Treasury yields recovered, while the shorter-term 2-year rate declined.
The US Dollar (USD) measured by the US Dollar Index (DXY) continued climbing higher on Wednesday, rising above the 20-day Simple Moving Average (SMA) towards a six-day high of 106.52. US yields’ recovery and positive housing market data allowed the Greenback to find demand.
The focus is on the United States’ economic situation as markets await data to continue modeling their expectations on the next Federal Reserve (Fed) decisions. As for now, the strongest case is that the bank won’t deliver any additional hikes in 2023, but Gross Domestic Product (GDP) preliminary estimates from Q3 on Thursday and Personal Consumption Expenditures (PCE) figures from September on Friday may change those expectations.
Daily Digest Market Movers: US Dollar edges higher while investors await economic activity figures
- The DXY index jumped towards 106.50, above the 20-day Simple Moving Average (SMA).
- The US Census Bureau revealed that September New Home Sales came in higher than expected. The headline figure showed 0.759M new home sales, higher than the consensus of 0.68M, and increased in relation to its last reading of 0.676M.
- The 5- and 10-year US yields rose sharply to 4.87% and 4.90%, respectively.
- Focus now shifts to high-tier data to be released on Thursday and Friday. The US Q3 GDP growth is expected to have accelerated, and the PCE inflation to have decelerated in September.
- According to the CME FedWatch Tool, the odds of a 25 basis points hike in December are still low, around 25%. In addition, the tool suggests that a pause in November is nearly priced in.
Technical Analysis: US Dollar Index bulls step in and conquer the 20-day SMA
Based on the daily chart, the DXY Index maintains a neutral to bullish technical perspective after buyers conquered the 20-day Simple Moving Average (SMA). With a positive slope above its midline, the Relative Strength Index (RSI) signals a bullish stance, while the Moving Average Convergence (MACD) exhibits lower red bars. Moreover, the DXY is above the 20, 100 and 200-day SMAs, suggesting that on the bigger picture, the bulls are in command over the bears.
Supports: 106.30 (20-day SMA), 106.00, 105.70.
Resistances:106.50, 107.00, 107.30.
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.
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