- The DXY Index recorded losses in Thursday’s session, falling toward 104.40.
- Retail Sales from January declined higher than expected.
- Weekly Initial Jobless Claims came in strong.
The US Dollar (USD) measured by the Dollar Index (DXY) declined further on Thursday, this time fueled by weak Retail Sales figures from January.
Despite the weak Retail Sales figure, the US economy continues to show signs of being overheated, as seen in the higher-than-expected inflation figures from January that reinforce the case for the Fed delaying rate cuts. On Friday, Producer Price Index (PPI) figures will be closely watched as they may provide additional traction to the USD in case they come in higher than expected.
Daily digest market movers: US Dollar loses ground on weak economic data
- Retail Sales declined -0.8% MoM in January, beating the 0.1% decline expected.
- Industrial Production from the first month of 2024 declined by -0.1% MoM, while markets expected a 0.3% expansion.
- On the bright side, Initial Jobless Claims from the week ending February 9, came in lower than expected at 212K.
- Despite the weak data, markets are still confident about delaying rate cuts by the Federal Reserve (Fed), and as long as investors push the start of easing to June, the USD’s losses are limited.
Technical analysis: DXY will be good as long as buyers hold the 100-day SMA
The technical analysis on the daily chart reflects a negative slope in the Relative Strength Index (RSI), indicating selling momentum in the short term. The Moving Average Convergence Divergence (MACD) shows decreasing green bars, further supporting the concept of selling pressure.
However, despite these short-term negative indicators, the Dollar Index remains above the 20, 100, and 200-day Simple Moving Averages (SMAs), suggesting that the overall trend is still controlled by bulls.
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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