- The US Dollar sees gains for this week following better than expected US CPI and PPI numbers.
- Traders advance the Fed's first rate cut to September.
- The Dollar Index is trading at a crucial level that could unlock 104.00.
The US dollar (USD) is trading in the green on Friday, after markets were shaken on Thursday following a spate of US economic data suggesting inflationary pressures are far from over. There was a textbook panic attack in the markets, with sales of risk assets such as equities and Bitcoin, rises in yields due to the sale of bonds and the strengthening of the US dollar against everything. The surprising rebound in the Producer Price Index (PPI) figures scared investors, who rushed to revalue the first interest rate cut by the Federal Reserve (Fed), moving it away from June and closer to September .
Some less relevant data will be published in Friday's economic agenda. Still, many investors will be preparing to square their positions ahead of next week's U.S. Federal Reserve rate decision and the Bank of Japan's event risk, which could opt to raise interest rates for the first time. in decades. For this Friday, import and export price data and preliminary data from the University of Michigan on consumer sentiment and inflation expectations for March did not hold surprises big enough to move the needle for this week.
Daily summary of market movements: Pressure for the week ahead
- February export and import price index:
- The monthly import price index fell from 0.8% to 0.3%, while the annual import index fell 0.8% in January.
- The monthly export price index fell from 0.0% to 0.8%. The annual export index fell 1.8% in January.
- The New York Empire State Manufacturing Index for March plummeted, going from -2.4 to -20.9.
- At 13:15 GMT, industrial production and production capacity utilization data for February were published. Production remained practically stable, from -0.5% to 0.1%. Capacity utilization remained unchanged at 78.3%.
- The latest data for this Friday, from the University of Michigan, was published at 14:00 GMT:
- Consumer sentiment in March fell slightly from 76.9 to 76.5
- Inflation expectations stood at 2.9% in February, unchanged.
- Stocks are trading cautiously in the green following the bloodbath in European and US stock markets. European indices are trading slightly higher, while US futures are flat ahead of the market open.
- According to CME Group's FedWatch tool, expectations of a Fed pause at the March 20 meeting stand at 99%, while the odds of a rate cut stand at 1%. The odds of a rate cut in June are around 60%, down from 70% a week ago.
- The 10-year US Treasury yield is trading around 4.32%, the highest level of the week.
US Dollar Index Technical Analysis: Prices have already risen
The US Dollar Index (DXY) – not Elvis Presley, of course – returned to the fore on Thursday after markets were rocked with the dollar the only winner. While the PPI numbers may have raised some concerns about the June timing, this is again a mere repricing, moving the likelihood of that initial rate cut from June to September. It's the same story we've seen so far this year, meaning the chance of the DXY pulling back to 103.00 is substantially higher than the chance of it rallying to 104.00.
To the upside, the 55-day SMA at 103.42 is facing some pressure. Not far above, a double barrier is ready to hit with the 100-day SMA near 103.68 and the 200-day SMA near 103.70. Depending on the catalyst that drives DXY higher, 104.96 remains the key level on the upside.
As mentioned in the opening paragraph on technical analysis, Thursday's move already covers that pullback of a rate cut through September, and a move further into December seems highly unlikely. Therefore, further declines seem inevitable once markets move back towards the June probability, with 103.00 and 102.00 as the next reference points. Once there, the way is open for another leg down to 100.61, the 2023 low.
Frequently asked questions about central banks
What does a central bank do?
Central banks have a key mandate to ensure price stability in a country or region. Economies constantly face inflation or deflation when the prices of certain goods and services fluctuate. A constant rise in the prices of the same goods means inflation, a constant fall in the prices of the same goods means deflation. It is the central bank's job to keep demand in line by adjusting its interest rate. For the largest central banks, such as 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%.
What does a central bank do when inflation is below or above the expected target?
A central bank has an important tool to raise or lower inflation: modify its reference interest rate. At pre-communicated times, the central bank will issue a statement with its reference interest rate and give additional reasons why it maintains or modifies it (cuts or raises it). Local banks will adjust their savings and loan rates accordingly, which in turn will make it harder or easier for citizens to make a profit on their savings or for companies to borrow and invest in their businesses. When the central bank substantially raises interest rates, we speak of monetary tightening. When you reduce your reference rate, it is called monetary easing.
Who decides monetary policy and interest rates?
A central bank is usually politically independent. Members of the central bank's policy council go through a series of panels and hearings before being appointed to a position on the policy council. Each member of that council usually has a certain conviction about how the central bank should control inflation and the subsequent monetary policy. Members who want a very loose monetary policy, with low rates and cheap loans, to substantially boost the economy, while settling for inflation slightly above 2%, are called “doves.” Members who prefer higher rates to reward savings and want to control inflation at all times are called “hawks” and will not rest until inflation is at 2% or just below.
Is there a president or head of a central bank?
Typically, there is a chairperson who leads each meeting, has to create a consensus among the hawks or doves, and has the final say when votes need to be divided to avoid a 50-50 tie on whether to adjust current policy. The president will give speeches, which can often be followed live, in which he will communicate the current monetary stance and outlook. A central bank will try to push its monetary policy forward without causing wild swings in rates, stocks, or its currency. All central bank members will channel their stance toward markets ahead of a monetary policy meeting. A few days before a monetary policy meeting is held and until the new policy has been communicated, members are prohibited from speaking publicly. This is what is called the silent period.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
