- The Greenback lost substantially on Thursday after Powell did not bring anything new to the table.
- A very light data calendar on Friday offers room for traders to digest past week events.
- The US Dollar Index strengthened somewhat on Friday amid escalating tensions in the Middle East.
The US Dollar (USD) lost substantial ground in the aftermath of the speech from US Federal Reserve Chairman Jerome Powell on Thursday. Powell’s remarks did not hold any meaningful new elements, mainly repeating ideas from the most recent FOMC meeting. Markets were quick to sell the Greenback, sending the US Dollar to peak to 1.0620 against the Euro.
However, there was a quick turnaround overnight as geopolitical tensions in the Middle East took over. A military base in Southern Syria, where US soldiers were housed, came under fire. At that same time reports came in that the US Navy destroyer USS Carney had shot down multiple Houthi missiles. With very light economic data at hand, it is expected that traders will be on edge for any reactions and possible retaliations of the US in the region.
Daily digest: US Dollar event risks
- Philadelphia Fed President Patrick Harker is the last Fed member to speak before the start of the blackout period of the next FOMC meeting to take place on November 1. He mentioned to keep interest rates unchanged at the next meeting as he sees economy softening faster than expected.
- Last data point on the calendar is later this Friday with the Baker Hughes US Oil Rig Count around 17:00 GMT. The previous number was at 501.
- Equities are again not dealing well with the recent and overnight headlines: Asian indexes are down near 0.50%. European equities are deep in the red, registering losses of more than 1%, while US equity futures are declining by around 0.50%.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 98.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
- The benchmark 10-year US Treasury yield trades at 4.93%, a few basis points lower from the near 5% where it was trading earlier. With geopolitical tensions soaring and possibly the US starting to play a more active role in the field, demand for bonds might further increase.
US Dollar Index technical analysis: Dollar rally got faded
The US Dollar is being torn in two, based on its performance for the week in the US Dollar Index (DXY). On the one hand, the geopolitical situation in the Israel-Palestine region is asking for more US Dollar strength, while recent Fed communication and the slowdown in certain economic numbers asks for a weaker Greenback. It will be a push-and-pull scenario with no clear path going forward.
A bounce above the daily trendline from July 18 might still materialise, although this level is starting to slip further away. On the topside, 107.19 is an important level to reach. If this is the case, 109.30 is the next level to watch.
On the downside, the recent resistance at 105.88 did not do a good job supporting any downturn. Instead, look for 105.12 to keep the DXY above 105.00. If that fails to do the trick, 104.33 will be the best level to look for resurgence in US Dollar strength, with the 55-day Simple Moving Average (SMA) as a support level.
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.