- USD slid following the University of Michigan Sentiment figures and housing market data.
- Markets remain confident about a cut in September.
- Greenback might continue being sensitive on data releases.
On Friday, the US Dollar (USD), as measured by the US Dollar Index (DXY), experienced a decline following the release of the University of Michigan’s Consumer Sentiment Index figures and softer-than-expected housing market data.
As per the US economic outlook, careful evaluation of the data suggests that the US economy is maintaining growth above trend. This portrays an overestimation by the market in pricing for aggressive easing as the Federal Reserve (Fed) remains data-dependant.
Daily digest market movers: Dollar down after mixed UoM data and soft housing market figures
- The University of Michigan’s Consumer Sentiment Index recorded an improved figure of 67.8 for early August, rising from July’s 66.4. It also outperformed the market expectation of 66.9.
- Following a decrease to 60.9 from 62.7, the Current Conditions Index illustrated a decline, while the Consumer Expectations Index registered an increase to 72.1 from 68.8.
- In contrast, Housing Starts in the US recorded a decline of 6.8% in July, down to 1.238 million units, signaling a softened housing market.
- Additionally, Building Permits decreased by 4% after a rise of 3.9% in June.
- Markets remain overconfident that the Fed will rush to cut, but it will all depend on incoming data.
DXY technical outlook: Consolidation trend continues, overall bearish bias remains
Technical analysis indicates a sideways trend in the DXY with indicators showing a deep consolidation in negative terrain. The Relative Strength Index (RSI) is currently around 40 with the Moving Average Convergence Divergence (MACD) indicator’s red bars stabilizing, suggesting subdued price action. Despite gains noted on Thursday, the overall technical picture remains bearish. Buyers are struggling to make a significant move with the DXY index trading in the 102.50-103.30 channel.
Support Levels: 102.40, 102.20, 102.00
Resistance Levels: 103.00, 103.50, 104.00
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.