Posted: Friday, May 17, 2020
The USD is limited by the cautious Fed officials and robust growth in Q2.
The markets continue to bet on the beginning of the easing cycle in September.
If the data continue to be below expectations, the Fed may consider a rate cut in July.
The US Dollar Index is trading at 104.50 and maintaining a neutral position. The US Dollar has gained a little at the end week due to the overall Q2 growth and the cautious stance of the Federal Reserve (Fed).
The US economy is still growing strongly in Q2 despite some signs of weakness. This has influenced the cautious stance taken by Fed officials. This unwillingness to cut rates seems to keep the Greenback on its feet and limit the downside.
Weekly digest: DXY remains neutral before the weekend and Fed is cautious
The Consumer Price Index (CPI), Retail Sales and Initial Jobless Claims figures for April, along with an increase in the weekly Initial Jobless Claims numbers, caused the US Dollar’s value to drop earlier this week.
Raphael Bostic is the President of the Atlanta Fed. He speaks positively about the inflation progress in April, but says the Fed will not lower its policy rate.
Loretta Mester is the President of Cleveland Fed. She believes that the current monetary policy position is appropriate as new data are reviewed. Thomas Barking, Richmond Fed President, believes current inflation rates have to be met.
CME FedWatch Tool shows that the markets have a higher probability of the first rate cut occurring in September.
DXY technical analysis: DXY outlook remains negative despite indicators flattening
Signals of uncertainty are evident in the daily chart indicators. The Relative Strength Index is not a good indicator of a strong selling momentum, despite the fact that it remains flat in the negative territory. Moving Average Convergence Divergence is also flat with red bars. This indicates a possible pause in an aggressive bearish trend.
The Simple Moving Averages (SMAs), on the other hand, paint a different picture. After a decline and subsequent rebound at the SMA of 100 days, the DXY Index remains below the SMA of 20 days. The bears may have temporarily held the ground. The bulls’ ability to remain above the 200-day SMA and the 100-day SMA indicates that they are still in the picture.
Central bank FAQ
The central banks’ main mandate is to ensure that prices are stable in a given country or region. When prices of certain goods and service fluctuate, economies are always faced with inflation or deflation. Inflation is caused by constant price increases for the same products, while deflation is caused by constant price decreases for the same items. The central bank’s job is to maintain demand by adjusting its policy rate. The biggest central banks, such as the US Federal Reserve (Fed), European Central Bank(ECB), or Bank of England (BoE), have a mandate to keep inflation at around 2%.
The central bank can use its policy rate benchmark, also known as the interest rate, to increase or decrease inflation. The central bank will announce its policy rate at pre-determined times and explain why it has changed or not (cut or increased) the rate. Local banks will adjust the rates of lending and saving to reflect this. This will either make it harder or easier to earn interest on savings, or for businesses to borrow and invest in their business. Monetary tightening is when the central bank raises interest rates significantly. It is monetary ease when the central bank lowers its benchmark rate.
A central bank can be politically independent. Before being appointed as a member of the central banking policy board, members must pass through panels and hearings. Members of the board have a strong opinion on the way the central bank should manage inflation and monetary policy. Members who want to have a loose monetary policy with low rates and cheap loans to stimulate the economy while they are content to see inflation just above 2% are known as ‘doves. Members who want higher rates for saving and to control inflation are known as ‘hawks.’ They will not stop until the inflation rate is below or at 2%.
Normaly, a president or chairman leads the meeting. He or she must create consensus between the doves or hawks, and have the final say if it comes down to a split vote to avoid a tie. The chairman delivers speeches that are often broadcast live and where the current monetary outlook and stance is communicated. The central bank will attempt to advance its monetary policies without causing violent fluctuations in rates, equity, or currency. Prior to a policy event, all members of the central banks will communicate their position toward the markets. Members are prohibited from speaking publicly a few days prior to a policy event. The blackout period is the time when members are forbidden from speaking publicly.
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