Market Data 
- Buyers are retreating after a five-day winning streak.
- US Treasury yields are declining but remain at multi-month highs.
- Investors are focusing on Fed Chair Powell’s hawkish stance.
The US Dollar Index (DXY) declined below 106.00 during the American session. However, the outlook for the Greenback is positive, as hawkish bets on the Federal Reserve (Fed) might act as a cushion. In addition, Wednesday’s downward movements may be seen as a slight correction.
The US economy is seeing sticky inflation and robust growth. Fed Chair Powell’s hawkish stance shows that instead of another rate hike, the Fed favors market tightening through higher yields and wider spreads, which strengthens the USD. However, with financial conditions still loose, further tightening is required and Powell commented on Tuesday that the monetary policy may need additional time to work.
Daily digest market movers: DXY corrects lower, Fed’s Beige Book show positive results and US yields decline
- The Fed’s Beige Book showed that economic activity expanded slightly, on balance, since late February.
- Federal Reserve Chair Powell was seen hawkish on Tuesday and warned that there is little progress on inflation. He also stated that the bank remains data-dependent.
- The possibility of a rate cut in the next meeting in June stands at around 15%, a huge drop compared to the previous week’s 60%. Also, the chances for a July rate cut have fallen below 50%.
- The first-rate cut is expected to take place in September with a 95% probability, followed by another in December at a 70% probability.
- The US Treasury yields for the 2-year, 5-year, and 10-year Treasury bonds are currently standing at 4.93%, 4.63%, and 4.61%, respectively, down on the day. Despite the recent decrease, the 2-year and 10-year yields are at their highest since November.
DXY technical analysis: DXY displays bulls’ stronghold despite overbought conditions.
On the daily chart, the Relative Strength Index (RSI) continues exhibiting overbought conditions, hinting at an upcoming correction or consolidation phase. The Moving Average Convergence Divergence (MACD) shows decreasing green bars, implying that the buying momentum is losing steam and that the bears may soon take charge.
However, the pair is comfortably positioned above its 20, 100,and 200-day Simple Moving Averages (SMAs), indicating the bulls’ dominance in the current scenario. This suggests a positive medium to long-term outlook, with the bulls defending their ground despite the technical indicators pointing toward a short-term bearish influence.
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.
