Market Data 
- A sharp recovery in US Dollar triggered by cautious market sentiment.
- Bets for interest rate cut at the September Fed meeting continue to receive pressure from Fed officials.
- US Treasury yields also fuel recovery in USD with 2-year yield rising to 5.00%.
The US Dollar Index (DXY) is showing a sharp recovery, hovering around the 105.00 mark on Wednesday. Amid this climate, investors remain risk-averse. As Federal Reserve (Fed) officials’ continuous asking for patience has resulted in reduced bets on a rate cut for the upcoming September Federal Open Market Committee (FOMC) session. As a reaction, US Treasury yields recovered.
As the US economy remains strong, the likelihood of cuts in June and July remains low, with markets keenly looking forward to data that would aid in placing bets for the September meeting. The Wednesday session should see subsequent highlights in the form of the Fed’s Beige Book report.
Daily digest market movers: DXY recovers as markets await drivers
- Investor expectations see a rate cut to start in the last quarter of the year.
- As the economic calendar awaits highlights, markets will look for clues about the US economy in the Fed’s Beige book report, which will be released later in the session.
- US Treasury yields soared and the 2-year yield rose to 5%, while the 5 and 10-year rates gained to 4.63% and 4.62%, respectively.
DXY technical analysis: US Dollar makes remarkable recovery, bulls aim to consolidate above 105.00
The daily chart indicators signify a recovery in the DXY. The Relative Strength Index (RSI) rose above the 50 level, indicating reduced selling pressure and a potential shift in momentum. To further establish bullish momentum, the DXY managed to regain territory above the 20-day Simple Moving Average (SMA).
The Moving Average Convergence Divergence (MACD) displays fading red bars, suggesting a potential end of the bearish trend and an onset of bullish sentiment. For the bulls to continue gaining ground, consolidation above 105.00 would be required.
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.
