- The Greenback rallies for a third straight day this week, though flirts with a flat print.
- US yields continue to increase, nearing the 5% threshold again.
- The US Dollar Index edges up after breaking back above 106.00 and flirts with 107.00 for this week.
The US Dollar (USD) is losing its gains from earlier this Thursday as a big batch of upbeat US data proves to be no match for the European Central Bank and its President Christine Lagarde. During the verbal communication, Lagarde is pushing the Euro higher against the Greenback, erasing all incured losses from earlier this trading session. Despite a very doom-and-gloom outlook on the eurozone, and refraining from issuing any forward guidance, markets perceive this as the ECB trying to keep their hands free to cut at any moment in order to provide much needed oxygen to the EU economy.
On the economic data front, no less than thirteen data points were issued all at the same time, near12:30 GMT. Nearly all data points were an upbeat surprise and are showing a staggering performance from the US economy. Once the dust will start to settle on this trading day and its data points and ECB press conference and communication, the Greenback should prevail on the back of this.
Daily digest: US Dollar sees Euro trying
- The European Central Bank (ECB) has kepts its benchmark rates unchaged at 4%, issuing a statement that it will keep its rate steady for longer to battle against the elevated inflation levels in the eurozone.
- At 12:30 GMT, a big batch of US data was released:
- Initial Jobless Claims came in at 210,000, an increase from 198,000. Continuing Claims went higher as well, from 1,727,000 to 1,790,000.
- Personal Consumption Expenditures (PCE) Price Index for the third quarter saw the Core Index dropping from 3.7% to 2.4%.
- Gross Domestic Product (GDP) data for the third quarter: the Price Index component went from 1.7% to 3.5%. The Annualised growth rate outperformed from 2.1% to 4.9%.
- Durable Goods preliminary reading for September: The headline index was a big beat on expectations, from -0.1% to 4.7%. The component without transportation was kept steady at 0.5% .
- Near 12:45 GMT, ECB President Christine Lagarde gave her speech and guidance. What stood out was the fact that she repeated several times the EU economy was weak and that the ECB refrains from any forward guidance at this point. Rate cuts apparently have not been discussed.
- During that same press conference from the ECB, around 13:00 GMT, headlines or comments were expected from the Federal Reserve member Christopher Waller. Though apparently nothing on monetary policy was issued.
- US housing data around 14:00 GMT, with Pending Home Sales: Sales are expected to decline 1.5% in September compared with the previous month, less than the 7.1% plunge seen in August. On an annual basis, Pending Home Sales declined 18.3% in August.
- The Kansas City Fed Manufacturing Index for October is expected around 15:00 GMT. The previous reading came at -13.
- The US Treasury will try to refund two tenors this Thursday: at 15:30 a 4-week bill to be auctioned, and at 17:00 GMT a 7-year note to be allocated.
- Equities are seeing investors flee ahead of the volatility this Thursday: Asian equities are sinking over 1% in Japan and Chinese equities are down by 0.5%. European equities are not expecting any help from the ECB this Thursday, and are sliding more than 1% . In the US, equity futures are off the low and could pop in the green if the intraday recovery continuous.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 97.1% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
- The benchmark 10-year US Treasury yield trades at 4.92%, popping back to that feared 5% level. The million Dollar question here is what will happen once the benchmark breaks back above 5%.
US Dollar Index technical analysis: Rate differential remains biggest support for DXY
The US Dollar is climbing the ladder again after being in the gutter at the start of the week. The Greenback is on its way back to its throne as the DXY US Dollar Index is shooting higher and might even stretch further. Risk element hanging over a possible implosion of the DXY hangs in the balance, with the US 10-year yield flirting again with 5%.
The DXY has consolidated above 106.00 and looks to keep stretching higher. Look for a possible jump above 106.92. If this level can be reclaimed by US Dollar bulls, then look for 107.00 on the topside again.
On the downside, the recent resistance at 105.88 did not do a good job supporting any downturn and now completely has lost its importance. Instead, look for 105.12, which is a pivotal historic line and almost falls in line with the 55-day Simple Moving Average (SMA) to keep the DXY above 105.00, and which worked already quite ahead of it on Tuesday. Should this level fail to do the trick, a big air pocket could develop and see the DXY drop to 103.74, near the 100-day SMA, before finding ample 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.
Read the full article here