US Dollar tallied weekly gains on hawkish Fed speakers

  • Notable monetary divergence between Fed, G10 peers keeps USD afloat.
  • Markets await further economic reports for insights into the US economy’s health for potential adjustments to Fed expectations.
  • Next week’s highlight will be April’s US CPI.

The US Dollar Index (DXY) is currently trading around the 105.35 mark, posting mild gains on Friday near the end of the trading week. The Greenback holds its ground but seems stuck as markets await drivers to continue placing their bets on the next Federal Reserve (Fed) decisions.

The US economy remains on shaky ground, and markets are expecting signs of decelerating inflation, which gives the Fed confidence to start cutting. In the meantime, the bank’s officials remain hawkish.

Daily digest market movers: DXY remains firm as markets digest Fed speaker’s words

  • San Francisco Fed President Mary Daly emphasizes need for prolonged restrictive policy to achieve Fed’s inflation targets.
  • Atlanta Fed President Raphael Bostic hinted at a possible economic deceleration. The exact timeline for rate cuts, however, remains uncertain in his view.
  • Overall, Fed remains careful concerning initiation of easing policy. Despite a few Fed officials expecting a single rate cut this year, majority of market predictions foresee rate cuts starting in September. This conservative Fed strategy starkly opposes Powell’s dovish indications from last week.
  • Outcome of April’s Consumer Price Index (CPI) will be key for markets to continue shaping their expectations.

DXY technical analysis: DXY showcases mixed sentiment with both bulls and bears struggling for strength

The indicators on the daily chart are radiating a rather mixed picture. On one hand, the Relative Strength Index (RSI) plots a positive slope but remains in negative territory. This indicates that while the selling pressure is currently stronger, buying momentum is slowly creeping up, suggesting a potential shift in the near future.

Similarly, the Moving Average Convergence Divergence (MACD) sticks with flat red bars, indicating no strong impulse from either side.

The Simple Moving Averages (SMAs) also carry a mixed signal. Despite the DXY falling below the 20-day SMA due to bearish interference, it remains above both the 100-day and 200-day SMAs. This scenario indicates that while bears have been successful in shaping the short-term trajectory, bulls retain control over the medium to long-term trend.

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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