- The DXY Index recorded losses in Wednesday’s session, falling toward 104.70.
- Investors are taking profits from Tuesday’s rally following CPI.
- Focus now shifts to Retail and PPI data from January.
The US Dollar (USD) measured by the Dollar Index (DXY) experienced a dip on Wednesday as it declined near 104.70. This downward trajectory is primarily attributed to investors securing gains following the Greenback’s rally on Tuesday following January CPI results showing stubborn inflation. This fueled a recalibration of the Federal Reserve’s (Fed) rate easing expectations. For the remainder of the week, markets will eye the Producer Price Index (PPI) and Retail Sales to continue placing their bets on the next Fed decisions.
There is a growing market consensus that the Fed is unlikely to cut rates in the near term, supported by hot inflation data releases and cautious Fed officials. This adjustment in easing expectations will likely lend further strength to the USD after this consolidation. As for now, markets are delaying their prediction of the start of the easing cycle to June.
Daily digest market movers: US Dollar takes a breather to consolidate CPI gains
- No relevant reports were released by the US during the session.
- On Friday, the US will release January’s Retail Sales and Producer Price Index figures, which may provide additional volatility to the USD.
- US Treasury bond yields also consolidated. Current rates place the 2-year yield at 4.56%, the 5-year yield at 4.22%, and the 10-year yield at 4.25%, which made the US Dollar struggle to find demand on Wednesday
- According to the CME FedWatch Tool, the odds of a cut at the May meeting have significantly declined, and markets are now pushing the start of the easing cycle to June. A hold at the March meeting is now the mainstream view.
Technical analysis: DXY bull’s momentum eases, but buyers are still in control
The Relative Strength Index (RSI) on the daily chart reflects a negative slope in positive territory. The dip in the RSI, typified by declining momentum, is indicative of reduced buying strength, which can be considered a potential sign of selling pressure. Simultaneously, the Moving Average Convergence Divergence (MACD) histogram shows flat green bars. Normally, this flat alignment would suggest a balanced state between buyers and sellers in the short term fueled by the profit-taking action of the bulls.
Despite these signals, the stronger indicator here appears to be the positioning above the 20, 100 and 200-day Simple Moving Averages (SMAs). This suggests that the overall trend remains bullish and that buyers are dominating the market in the longer term despite a potential short-term reversal.
Overall, although some pullback may be expected due to profit-taking in the short term, as reflected by the negative slope of the RSI and a flat MACD, the overall bullish trend seems to be intact with bulls maintaining substantial control.
Central banks FAQs
What does a central bank do?
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%.
What does a central bank do when inflation undershoots or overshoots its projected target?
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.
Who decides on monetary policy and interest rates?
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%.
Is there a president or head of a central bank?
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.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.