- US Dollar, observed a fall reaching the lowest value since March.
- Federal Reserve bets continue to lean in favour of a dovish stance, consequently impacting the USD.
- Strong Housing data could not prevent this decline.
On Thursday, the US Dollar measured by the DXY index saw an extension in its decline, despite the strong housing data reported during the European session. Factors such as dovish bets on the Federal Reserve and lower US Treasury Yields are responsible for putting downward pressure on the USD.
The outlook for the US economy shows signs of disinflation, and markets are keeping confidence a potential cut in September. The Federal Reserve officials continue to show hesitation rushing to cuts and maintain a data-dependent approach and seem to put a cut in July on the table.
Daily digest market movers: DXY decline, housing data no help for the struggling USD
- Data concerning Housing Starts in June reported an improvement of 3%, amounting to 1.35 million units.
- According to the data unveiled by the US Census Bureau on Tuesday, this figure follows a decrease of 4.6% recorded in May.
- Building Permits showed a surge of 3.4% after a decline of 2.8% in the previous month.
- Thomas Barkin, the Richmond Federal Reserve President, suggested that the discussion at the July policy meeting will likely include whether it is still apt to describe inflation as elevated, as reported by Reuters.
- As per the CME FedWatch Tool, a rate cut in September seems to be priced in which pressured the USD down.
DXY Technical Outlook: DXY’s bearish outlook remains, a minor correction to the upside possible.
Despite the decline, the DXY is grappling to regain the 104.00 area. Even though the daily indicators including Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are far below the 50-mark, pointing towards a near-oversold condition, the DXY could see a slight correction.
Strong supports lie at the 103.50 and 103.00 levels. However, the overall technical outlook remains bearish.
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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