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US Dollar advances after US economic data

  • The US dollar is trading at its highest level this week following US economic data.
  • Fed’s Bowman delivers ultra-tough comments.
  • The US Dollar Index is trading in the green and is back above 105.50.

The US dollar (USD) rises in a double whammy moment where first US Federal Reserve member Michelle Bowman issued hawkish comments saying a rate cut is not in the cards, pointing to downside risks. higher inflation. Shortly after, it is confirmed with Canadian inflation that reaches very high, rising from 2.7% to 2.9%, when 2.6% was expected. At the same time, the US Home Price Index also rose, from 0.0% to a 0.2% increase.

On the economic front, all eyes are now on consumer confidence after last week’s retail sales signaled a very sluggish consumer in the US. Additionally, two members of the US Federal Reserve. (Fed) will take the floor and could comment on the current stance of monetary policy. A highlight on the agenda is Thursday’s first presidential debate between current US President Joe Biden and former US President Donald Trump.

Daily digest of market drivers: Markets are blind again

  • At 12:30 GMT, the Chicago Fed National Activity Index for May was released, standing at 0.18 from -0.26 in April.
  • At 13:00 GMT, the house price index for April was published. An increase of 0.3% was expected after rising 0.1% in March, although the April figure stood at 0.2%, which overall still points to growth in house prices.
  • The Conference Board Consumer Confidence Index and the Richmond Fed Manufacturing Index for June were both released at 14:00 GMT. Consumer Confidence went from 102.00 in May to 100.40 in June. The Richmond Manufacturing Index missed the consensus of 2.0 and fell into contraction to -10 from 0 previously.
  • Two US Federal Reserve officials will take the stage:
    • At 11:00 GMT, Federal Reserve Governor Michelle Bowman gave a speech on US monetary policy and bank capital reform at the Policy Exchange UK event in London, UK. She remained very hawkish in saying that hikes are still on the table if necessary, and that there are still too many risks of upside surprises in inflation.
    • At 16:00 GMT, Federal Reserve Governor Lisa Cook will deliver a speech on the US economic outlook at a luncheon at the Economic Club of New York.
    • To close the day, at 18:10 GMT, Bowman will deliver pre-recorded opening remarks at the Midwest Cyber ​​Workshop hosted by the Federal Reserve Bank of St. Louis, Chicago and Kansas City.
  • European stocks are set to close this Tuesday in deep red, while US stocks are heading into the green ahead of the European close, although the Dow Jones is an exception.
  • The CME’s Fedwatch tool supports a rate cut in September, with the odds now at 61.1% for a 25 basis point cut. A rate pause has a 32.3% chance, while a 50 basis point rate cut has a slim 6.6% chance.
  • The US 10-year yield is trading at 4.24%, fairly stable since the end of last week. The spread between France’s and Germany’s 10-year benchmark rates has fallen from 0.79% to 0.74% and is softening somewhat, although it remains the highest level in more than six years.

The central banks

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%.

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.

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.

Typically, there is a chair 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 without causing violent 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

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