US Dollar rallies with traders push back beyond June for Fed cut
- The US Dollar trades stronger after PPI was a beat on all fronts.
- Traders see US Jobless Claims declining.
- The US Dollar Index trades above 103.00, and extends gains above it with the US session picking up steam.
The US Dollar (USD) trades in the green on Thursday after both US Retail Sales for February and Producer Price data got released. It was the Producer Price release which had the last say in where the Greenback would go. With a firm beat in both the Headline and the Core measures, traders are starting to get nervous that June might become an uncertainty for that initial rate cut from the US Federal Reserve.
On the economic data front, only one datapoint left for this Thursday to digest with the Business Inventories for January. Do not expect anything market moving from this number, and rather look for the Greenback to rally further once the European session is set to close and the US session takes over completely. Traders meanwhile will be looking ahead for the Industrial Production and University of Michigan numbers on Friday.
Daily digest market movers: Another delay
- A big list of data to released near 12:30 GMT:
- Weekly Jobless Claims:
- Initial Claims came in lower from 210,000 to 209,000.
- Continuing Claims headed from 1.794 million to 1.811 million.
- US Retail Sales for February:
- Monthly Retail Sales went from a resived -1.1% to 0.6%, below the estimate of 0.8%.
- Monthly Retail Sales without Cars and Transportation jumped from -0.8% to 0.3%, where 0.5% was expected.
- US Producer Price Index (PPI) for February:
- The monthly Headline PPI jumped from 0.3% to 0.6%.
- The Yearly Headline PPI rallied from 1% to 1.6%.
- The monthly Core PPI declined from 0.5% to 0.3%.
- The Yearly Core PPI remained stable at 2.00%.
- Weekly Jobless Claims:
- The January Business Inventories data are due to be released around 14:00 GMT. Inventories growth is expected to decline from 0.4% to 0.2%.
- Equities are rolling over on the hot PPI print and are giving up all their gains from this Thursday in both Europe and the US.
- According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the March 20 meeting are at 99%, while chances of a rate cut stand at 1%.
- The benchmark 10-year US Treasury Note trades around 4.27%, extending gains for this Thursday and this week. Overall in the bond space yields are soaring.
US Dollar Index Technical Analysis: Okay, so not June?
The US Dollar Index (DXY) is trading higher and is flirting with a break above 103.00 after the upside surprise in all elements on the Produce Price data. Markets were geared up for rather a confirmation of further disinflation, which seems not to be the case. Question will start to arise now if June is still possible and a pushback could be at hand seeing the tighter window in which data needs to start convincing the US Federal Reserve that the timing is right for that initial rate cut.
On the upside, the first reclaiming ground is at 103.38, the 55-day SMA. Not far above, a double barrier is set to hit with the 100-day SMA near 103.68 and the 200-day SMA near 103.70. Depending on the catalyst that pushes the DXY upwards, 104.96 remains the key level on the topside.
The DXY was unable to even test or challenge the 55-day SMA after the CPI print. More downside looks inevitable with 102.00 up next, which bears some pivotal relevance. Once through there, the road is open for another leg lower to 100.61, the low of 2023.
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.
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