- The US dollar was flat against major currencies on Tuesday.
- Markets have regained momentum from last Friday and are returning to a riskier stance as tensions in the Middle East have eased somewhat.
- The US Dollar Index is trading sideways at just below 101.00.
The US Dollar (USD) recovered briefly on Monday after a sharp drop last week, but has yet to make a significant gain this Tuesday. The US Dollar rose against most major Asian currencies, including the Japanese Yen (JPY) and the South Korean Won (KRW), but these gains have been reversed in the US trading session. As safe haven flows recede amid easing fighting in the Middle East, a risk-on mood appears to have returned to the market, driving stock prices higher in Asian, European and US futures markets.
On the US economic calendar, the June home price index showed no significant changes. It became clear that the housing market is in a gradual decline but is far from collapsing. Attention will now turn to the August consumer confidence index, a leading indicator.
Daily Digest Market Trends: Consumer Confidence Index Soars
- The US session started with the Red Book index for the week ending August 23. The previous reading was 4.9% and the latest reading was 5%.
- The house price index weakened slightly to -0.1% in June, but the previous reading showed prices were unchanged.
- As of 3pm GMT, consumer confidence index for August stood at 103.3, well above the previous reading of 100.3 and above the forecast high of 103.00.
- Also at 14:00 GMT, the Richmond Fed manufacturing index for August fell further from -17 to -19.
- The stock market is showing signs of changing, with U.S. stocks heading for a small decline.
- According to the CME Fedwatch tool, there is a 71.5% chance that the Fed will cut rates by 25 basis points (bps) in September, a 28.5% chance of a 50 bps cut, a 50.2% chance of another 25 bps cut in November (if the 25 bps cut was made in September), a 41.3% chance that rates will be 75 bps (25 bps + 50 bps) lower than current levels, and an 8.5% chance that rates will be 100 bps (25 bps + 75 bps) lower.
- The 10-year U.S. Treasury yield traded at 3.85%, a new weekly high.
US Dollar Index Technical Analysis: Looking for Clues and Key Takeaways
The US Dollar Index (DXY) saw a big drop last week, dropping it below several key support levels as the market is pricing in a bold Fed rate cut by November. The recovery from Monday was already a good start considering the market may have overstated its assumptions about how big and how many rate cuts the Fed would actually make. However, the DXY has not been able to recover, which is why upcoming data will be crucial. Once the market starts pricing in a rate cut, strong data could trigger a turning point and support the DXY to rise.
The DXY has a long way to go to recover. First, 101.90 is the level to recover from. A 2% surge is needed to take the index from the current 101.00 to 103.18. A very strong resistance level around 104.00 not only has crucial technical value but also serves as the second heavyweight limiting price fluctuations, the 200-day Simple Moving Average (SMA).
On the downside, 100.62 (Dec 28 low) is trying to hold support but looks quite weak. If it breaks below this, the final watch level will be the July 14, 2023 low of 99.58. If that level breaks down, the initial 2023 level will be around 97.73.
US Dollar Index: Daily Chart
Central Bank FAQs
Central banks have an important mission to ensure price stability in a country or region. Whenever the prices of certain goods and services fluctuate, the economy faces inflation or deflation. If the price of the same goods is constantly rising, it means inflation, and if the price of the same goods is constantly falling, it means deflation. It is the role of the central bank to fine-tune the policy interest rate to maintain demand. The mission of the largest central banks such as the US Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of England (BoE) is to keep the inflation rate close to 2%.
Central banks have one key tool at their disposal to raise or lower the inflation rate: tweaking the benchmark interest rate, commonly known as the interest rate. With advance notice, the central bank issues a statement on the benchmark interest rate and provides additional reasons for why it will keep it constant or change it (lower or raise it). Local banks adjust their savings and lending rates accordingly. As a result, it becomes harder or easier for people to earn on their savings and for businesses to take out loans and invest in their businesses. When the central bank significantly raises interest rates, it is called monetary tightening. When the central bank lowers the benchmark interest rate, it is called monetary easing.
Central banks are often politically independent. Members of a central bank's policy committee are appointed to their seats through a series of committees and public hearings. Each committee member tends to have certain beliefs about how the central bank should control inflation and the associated monetary policy. Those who would boost the economy substantially with a very loose monetary policy of low interest rates and cheap lending, and would be happy with inflation just above 2%, are called “doves.” Those who favor high interest rates to reward savings and who are constantly vigilant against inflation are called “hawks” and will not rest until inflation is at or below 2%.
There is usually a chair or governor who leads each meeting, who must reach a consensus between hawks and doves, and who has the final say if votes are split to avoid a 50-50 tie on whether current policy should be adjusted. The chair gives a speech that communicates the current monetary policy stance and outlook, which is often available to watch live. Central banks try to advance monetary policy without causing wild fluctuations in interest rates, stocks, and currencies. All members of the central bank communicate their stance to the market ahead of the policy meeting event. Members are prohibited from speaking publicly from a few days before the policy meeting until the new policy is communicated. This is called a blackout period.
