US Dollar down after dovish FOMC minutes
- DXY index falls to its lowest level since January.
- Markets continue to aggressively bet on a dovish Fed.
- Powell’s words on Friday at the Jackson Hole Symposium will guide the markets.
The US Dollar (USD), as measured by the US Dollar Index (DXY), exhibits no signs of recovery and declined near 101.15 during Wednesday's trading session. This is due to intense dovish bets on the Federal Reserve (Fed) and with US Treasury yields continuing to struggle. In addition, the July's Federal Open Market Committee (FOMC) minutes showed that most of the participants were open for a September cut.
The US economic outlook continues to project growth above trend, providing ample indication that the market may be overly optimistic about quick and aggressive rate cuts.
Daily digest market movers: US Dollar continues soft after July FOMC minutes
- The Fed's July 30-31 meeting minutes showed a strong inclination towards cutting interest rates at the September meeting, with several members ready to act immediately.
- Most policymakers felt that easing was likely if data met expectations, noting that many viewed current rates as restrictive and a few believed maintaining them could further slow economic activity due to easing inflation pressures.
- The Fed specified in its statement that it will not consider a rate reduction until it gains greater confidence in sustainable inflation movement toward the 2% target.
- Additionally, the Fed has raised concerns about the state of the labor market.
- These remarks set the stage for a cautious tone from Powell at the Jackson Hole meeting this Friday, suggesting a possible 25 bps cut in September.
DXY technical outlook: Bearish dominance persists, index at yearly lows
The DXY technical outlook remains predominantly bearish. Current analysis shows that the index broke the sideways trading regime in the 102.50-103.30 band and fell to a yearly low, which offers a good case for sellers.
The DXY index remains under significantly bearish domination as indicated by the oversold status of the Relative Strength Index (RSI) and the rising red bars shown by the Moving Average Convergence Divergence (MACD).
Support Levels: 101.00, 100.80, 100.50 Resistance Levels: 101.50, 101.80, 102.00
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.