- DXY Index notes a slight uptick, currently trading near 106.00 mark.
- March Retail Sales exceed forecasts, bolstering bond yields and the US Dollar.
- Fed appears hawkish, adjustments to easing expectations produced Greenback rally last week.
The US Dollar Index (DXY) is currently trading higher near 106.05 on Monday, slightly down from its peak of 106.10 hit last week. Strong economic data continues to favor the hawkish rhetoric from the Federal Reserve (Fed), and the Greenback benefits from rising US Treasury yields. Tensions between Israel and Iran also contribute to a cautious market mood, which tends to favor the US Dollar.
The US economy shows robustness with Q1 growth indicating resilience and rising consumer spending backed by sturdy labour demand. The Fed’s stance leans toward hawkishness, adjusting its easing expectations and starting to signal a delay in rate cuts, buoyed by continuous robust growth and persistent inflation.
Daily digest market movers: DXY gains some ground as US Retail Sales surpass expectations
- The US Census Bureau revealed that March’s Retail Sales grew by 0.7% growth YoY, which is more than double the anticipated yearly growth rate of 0.3%.
- In reflection of the Fed position, hawkish sentiment continues to dominate as last week officials started to hint at a delay of rate cuts.
- Regarding expectations, the likelihood of a June cut fell to 25%, marking a decline from the previous week’s 60%. Concurrently, the probability for a July cut fell below 60%, in stark contrast to its previous full certainty.
- The market now predicts the first cut in September, with only a 75% likelihood of a second cut in December.
- US Treasury bond yields remain high, the 2-year yield stands at 4.94%, the 5-year yield at 4.65%, and the 10-year yield is set at 4.63%.
DXY technical analysis: DXY shows overbought conditions, might correct in the next sessions
The technical indicators on the daily chart reflect overbought conditions through the Relative Strength Index (RSI). This signifies that buyers have been dominating recently, driving up the value of DXY. However, this can often precede a correction if buyers become exhausted.
Simultaneously, the Moving Average Convergence Divergence (MACD) corroborates this leaning, exhibiting rising green bars. Such a pattern usually signals that the buyers have considerable momentum at their back.
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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.
