Market Data 
- US Dollar pauses as investors dissect recent comments from Federal Reserve officials.
- Markets appear skeptical about the Fed’s guidance and continue to anticipate potential cuts in September.
- Fed officials’ cautious remarks limit downside in the US Dollar.
On Wednesday, the US Dollar as measured by the DXY Index (DXY) remained relatively unchanged around the 105.20 mark as investors parsed words from key Federal Reserve (Fed) officials on a quiet Wednesday. Following last week’s 0.50% gain, the index is tallying a three-day losing streak.
The US economic outlook is starting to show some signs of weakness. If data continues to fuel hopes of a September interest rate cut, the USD may struggle.
Daily digest market movers: US Dollar flat as markets wrestle with Fed remarks
- Cleveland Federal Reserve President Loretta Mester voiced a preference for a “longer run of good-looking inflation data” before making a firm decision.
- Minneapolis Fed President Neel Kashkari expressed that waiting until December to cut interest rates could be a “reasonable prediction.”
- Philadelphia Federal Reserve President Patrick Harker proposed the likelihood of the Fed keeping rates steady for longer than the market currently anticipates.
- On a more dovish note, Fed Governor Adriana Kugler suggested that if economic conditions continue to show improvements, the Fed could consider additional rate reductions.
- Her colleague, Richmond Federal Reserve President Thomas Barkin, similarly indicated his readiness to back a rate cut but would need more data before doing so.
- According to the CME Group’s FedWatch Tool, the probability of lower interest rates by the upcoming meeting on September 18 now stands at about 67%, which clashes with Fed guidance that hinted at only one cut in 2024.
DXY technical analysis: Momentum falters, but bullish sentiment persists
Technical indicators displayed flat momentum for Wednesday’s session, yet the broader outlook remains optimistic. The Relative Strength Index (RSI) maintains above 50, with the Moving Average Convergence Divergence (MACD) still showcasing green bars that point toward bullish sentiment.
Additionally, the DXY continues to hold above its 20, 100 and 200-day Simple Moving Averages (SMA), which, coupled with investors’ apparent pause, presents a persistent bullish outlook for the US Dollar. However, these indicators suggest that the previous week’s momentum may be starting to wane, contributing to a consolidation phase in the DXY.
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.
