- The DXY rose by more than 0.50% to 104.50 on Monday.
- The US service sector continues to show robustness, making markets disregard an interest rate cut in March.
- US Treasury yields continue to rise, boosting the Greenback.
The US Dollar (USD) measured by the DXY index rose on Monday to 104.50, its highest level since mid-November. This upswing has been attributed to the fortifying ISM Services PMI for January, giving the Dollar Index an advantageous boost via markets giving up on hopes of an interest rate cut in March.
The US Federal Reserve’s hawkish hold, justified by a robust jobs report and continuous strong growth in Q1, is making any imminent rate cuts implausible, contradicting previous market expectations. Federal Reserve (Fed) Chair Powell maintains cautiousness, emphasizing the need to observe inflation’s sustained drop toward the 2% core target.
Daily digest market movers: US Dollar gains additional ground as Services PMI comes in higher than expected
- January’s ISM Services PMI recorded 53.4, beating the consensus figure of 52 and last month’s 50.5, as reported by the Institute for Supply Management (ISM).
- US bond yields continue to rise to monthly highs with 2-year, 5-year and 10-year bonds trading at rates of 4.45%, 4.11% and 4.15%, respectively. All three rates are up by more than 2%, which is making the US Dollar attractive for foreign investors.
- CME’s FedWatch Tool hints at lesser odds for a rate cut in March, currently standing at 15%. Those odds rise to 50% in May, but the probabilities of a hold are also high.
Technical analysis: DXY bulls extend gains and recover the 20-day SMA
The indicators on the daily chart reflect a potential shift in momentum in the short term. The Relative Strength Index (RSI) is nearing overbought conditions, which typically suggests that buyers may be losing their grip, although it does not immediately indicate a trend reversal.
However, evaluating the broader scale technical outlook paints a slightly different picture. The index now stands above the 20,100 and 200-day Simple Moving Averages (SMAs), suggesting a strong and sustained push from the bulls. This can be interpreted as a bullish signal on a broader outlook.
The overall combination of these indicators suggests that despite the RSI nearing overbought territory, the buying momentum, backed up by the rise in the Moving Average Convergence Divergence (MACD) and the position above the SMAs, is the more dominating force. Bulls look set to maintain control for now, especially as they continue recovering, which can often incite additional buying interest. That being said, traders should eye a potential reversal, due to indicators nearing overbought conditions.
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.