- DXY Index shows resilience despite the worst weekly performance over a month, hovering at 102.60.
- The US Dollar was lifted by strong S&P Global Services PMI figures from December.
- Dovish bets on the Fed may limit the upward movement.
The US Dollar (USD), measured by the DXY index, is trading at 102.60, posting daily gains but marking its worst weekly performance in over a month. This movement comes on the back of strong US Services PMI data and investors’ efforts to consolidate the losses of the last three sessions.
The US Federal Reserve held a dovish stance in Wednesday’s meeting, embracing lowered inflation at the end of 2023 with no planned rate hikes in 2024 and forecasting 75 bps of easing for next year. In light of this indication, market anticipations align somewhat with the Fed’s view, catalyzing risk-on flows and dampening demand for the haven Greenback.
Daily Market Movers: US Dollar gains momentum amid strong US Services PMI data
- The Dollar Index (DXY) records gains, wrapping up at around 102.4. This comes after a rough week for the DXY, marking its worst weekly performance in over a month.
- December saw an overall gain in the S&P Global Services PMI with 51.3, beating the consensus of 50.6 and the previous month’s 50.8.
- The Manufacturing PMI for December underperformed, recording 48.2 compared to the expected 49.3 and the previous 49.4. Moreover, despite expectations, December’s S&P Global Composite PMI exceeded the previous 50.7, scoring 51.
- The US bond yields are currently mixed, with a 2-year yield at 4.37%, slightly up, the 5-year yield at 3.90% and the 10-year yield at 3.92%, posting minor declines.
- The CME FedWatch Tool indicates that markets are currently predicting the first rate cut by March 2024, further weighing on the Greenback.
Technical Analysis: DXY bears take a step back
The indicators on the DXY daily chart reflect that bearish momentum largely dominates the market despite the bears taking a breather. The Relative Strength Index (RSI) shows a downward slope in negative territory, highlighting the presence of dominant selling momentum and underscoring lackluster buying enthusiasm among traders. Furthermore, the Moving Average Convergence Divergence (MACD) shows flat red bars, indicating that the bearish momentum is present but currently on a break.
Further confirmation of the prevalent bearish bias is provided by the positioning of the Simple Moving Averages (SMAs). The index trading below its 20, 100, and 200-day SMAs inherently points towards a firm grip of sellers in the broader technical landscape.
Given the current 1.50% weekly decline in the DXY value, the current consolidation phase could be a pause of the bearish trend rather than a reversal. The short-term technical outlook remains biased to the downside.
Support levels: 101.50, 101.30, 101.00.
Resistance levels: 103.45 (20 and 200-day SMA bearish crossover), 104.50 (100-day SMA), 104.70.
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