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US Dollar Stagnates Ahead of Jerome Powell’s Second Day Before US Congress

  • The US Dollar is treading water, not really moving in any direction.
  • Traders will be treated to no fewer than four Fed speakers on Wednesday.
  • The Dollar Index DXY is hovering around the 105.00 level and looking for direction.

The US Dollar (USD) is having a stable and very soft opening for the US session this Wednesday after a very dull European trading session. As such, that should come as no surprise, as US Federal Reserve (Fed) Chairman Jerome Powell’s semi-annual testimony before Congress on Tuesday did not bring any special comments or new angles that markets have not already priced in. It could have been a tape recorder playing back the Fed’s latest rate decision, with the conclusion being the same: Powell wants to keep rates steady for longer, as he fears starting to cut them too soon.

On the economic front, there is no real data to stand out, although it will be the secondary events that will get all the attention. With a 10-year bond auction coming up, it is an ideal time to see how the benchmark term will perform and how the appetite for US debt is in the bond market. Add to this, no less than three Fed members, plus Fed Chair Jerome Powell, who addresses Congress again on Wednesday, and it looks to be a fairly Fed-driven day.

Market Movers: Yawn

  • At 11:00 GMT, the Mortgage Bankers Association (MBA) has released the weekly Mortgage Applications data for the week ending July 5. Last week, a slight decline of 2.6% was seen, with another 0.2% drop for this week.
  • Wholesale inventory data for May will be released at 16:00 GMT. Expected to remain stable at 0.6%.
  • At 17:00 GMT, the US Treasury will allocate a 10-year Note to the market.
  • Several Fed members are scheduled to speak on Wednesday:
    • At 14:00 GMT, Federal Reserve Chairman Jerome Powell testifies before Congress, providing an overview of the economy and monetary policy.
    • Federal Reserve Governor Michelle Bowman and Federal Reserve Bank of Chicago President Austan Goolsbee will deliver opening remarks at the Fed Listens event in Chicago, United States, at 18:30 GMT.
    • Federal Reserve Governor Lisa Cook will deliver a speech titled ‘Global Inflation and Monetary Policy Challenges’ at the Australian Economists Conference 2024 in Adelaide, Australia, at 22:30 GMT.
  • Equity markets are a bit mixed, searching for direction with no real outliers in the European session.
  • The CME Fedwatch tool broadly supports a September rate cut despite recent comments from Fed officials. Odds now stand at 70.0% for a 25 basis point cut. A rate pause has a 26.7% probability, while a 50 basis point rate cut has a slim 3.3% chance.
  • The yield on the 10-year US Treasury bond is trading at 4.28%, near its weekly low.

Technical Analysis of the Dollar Index DXY: Boredom Ahead

The US Dollar Index (DXY) is again searching for direction with no substantial moves, even after Fed Chair Powell’s comments on Tuesday. Fatigue is setting in for the Dollar, with markets looking for any different message Powell can deliver. The continued message that interest rates should remain stable, that they are data-dependent, and that cutting borrowing costs too soon could be counterproductive, is starting to drive investors away from the Dollar.

On the upside, the 55-day simple moving average (SMA) at 105.16 remains the first resistance. If that level bounces back, 105.53 and 105.89 are the next pivotal levels nearby. The red downtrend line on the chart below around 106.23 and the April high at 106.52 could come into play if the Dollar rallies substantially.

On the downside, the risk of a dive is increasing, with only the double support at 104.80, which is the confluence of the 100-day SMA and the green ascending trendline from December 2023, still in place. If that double layer gives way, the 200-day SMA at 104.41 is the guardian that should trap the DXY and prevent further declines. Further down, the correction could head to 104.00 as an initial stage.

US Dollar Index: Daily Chart

Dollar Index: Daily Chart

Central Banks FAQs

Central banks have a key mandate which is to ensure price stability in a country or region. Economies constantly face inflation or deflation when 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 job of the central bank to keep demand in line by adjusting its interest rate. For larger 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: changing its benchmark interest rate. At pre-announced times, the central bank will issue a statement with its benchmark interest rate and give additional reasons for why it is holding or changing it (cutting or raising it). Local banks will adjust their savings and lending rates accordingly, which in turn will make it harder or easier for citizens to earn profits on their savings or for companies to borrow and invest in their businesses. When the central bank substantially raises interest rates, it is called monetary tightening. When it lowers its benchmark 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 particular conviction about how the central bank should control inflation and the resulting monetary policy. Members who want very loose monetary policy, with low rates and cheap loans, to substantially boost the economy, while being content with inflation just above 2%, are called “doves.” Members who prefer higher rates to reward saving and want to keep inflation under control at all times are called “hawks,” and they will not rest until inflation is at or just below 2%.

Typically, there is a chairman who chairs each meeting, has to build consensus between hawks or doves, and has the final say when votes must be split to avoid a 50-50 tie on whether current policy should be tightened. The chairman will make speeches, which can often be followed live, in which he or she 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 to the markets before 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 called a silent period.

Source: Fx Street

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