- US Dollar trades lower despite strong S&P PMIs
- The DXY Index took a downturn toward 103.05, below the 200-day SMA.
- US January S&P PMIs came in better than expected.
- All eyes are on Thursday’s PCE figures from December.
The US Dollar (USD), as expressed by the DXY Index, faced downward pressure falling towards 103.05. However, the USD’s losses may be capped by the report of strong economic activity figures, which may push investors to delay their rate cut expectations. Personal Consumption Expenditures (PCE) figures on Thursday will dictate the pace of the short term. In addition, growing tensions on the Red Sea might also benefit the Greenback in the next sessions.
The US economy is maintaining its robustness as traders await key data and central bank meetings later this week. Despite a lack of major data or any Fed speakers, the market pushed back its easing expectations to roughly 125 bps over 2024, down from nearly 175 bps earlier this month, which has helped the Greenback recover.
Daily Digest Market Movers: US Dollar loses traction as markets digest S&P PMIs
- The S&P Global Composite PMI released by S&P Global has posted 52.3 for January, surpassing the previous figure of 50.9.
- The Manufacturing PMI stood at 50.3 for January, reported by S&P Global, surpassing the previous and consensus figure of 47.9, indicating a solid growth in manufacturing activities.
- The Services PMI significantly beat the previous figure of 51.4 and consensus of 51 to settle at 52.9, highlighting a robust expansion in the services sector.
- For the Federal Reserve (Fed) these figures may present a threat to their battle against inflation, which could make them delay the start of the easing cycle.
- Projections from the CME FedWatch Tool show that the market’s expectations for the start of the easing cycle have shifted to May as the odds of a cut in March now stands near 42%.
- Those odds may change after the US releases December’s Personal Consumption Expenditures (PCE) figures, the Fed’s preferred gauge of inflation, on Thursday.
Technical Analysis: DXY bulls struggle to hold ground as bears takes center stage
The indicators on the daily chart are reflecting moving dynamics. A downturn can be seen in the Relative Strength Index (RSI), Despite being in positive territory, the negative slope indicates that the buying momentum has been losing strength.
The Moving Average Convergence Divergence (MACD) also aligns with this outlook. The decreasing green bars on the MACD histogram highlight the weakening of bullish momentum.
Looking at the Simple Moving Averages (SMAs), the index is straddling a key transitional area. Its ability to remain above the 20-day SMA suggests that the buyers still dominate the short term. That being said, the index is below the 100 and 200-day SMAs, a clear indication that the longer-term trend still favors the bears.
Support Levels: 103.00, 102.80, 102.60 (20-day SMA).
Resistance Levels: 103.50 (200-day SMA),103.70, 103.90.
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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