Market Data 
- The US Dollar still in the green after ADP release.
- Markets are supporting the Greenback for a second day despite another softer-than-expected JOLTS data on Tuesday.
- The US Dollar Index holds above 104.00 and looks to test nearby upside resistance.
The US Dollar (USD) edges a touch higher for a second day on Wednesday, with the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, still negative in the week after Monday’s meltdown. Although the JOLTS Job Openings report for April published on Tuesday showed another decline, even falling below consensus, the fact that the wages element in the report still pointed to a willingness to pay higher salaries is an issue and main driver for the US inflation outlook.
On the economic front, all eyes are on Automatic Data Processing (ADP) and the Institute for Supply Management (ISM). ADP has already released its monthly Employment Change ahead of the official US Employment report on Friday, while the ISM will give markets more insights on the Services sector. It is worth noting that the lacklustre performance of the ISM release about the Manufacturing sector was a main driver for the meltdown in the Greenback on Monday.
Daily digest market movers: ADP easing puts rate cuts on fore front
- Earlier in the day, the Mortgage Bankers Association (MBA) released its Mortgage Applications number for the last week of May. Data showed a -5.2% concerning the previous week against -5.7% already from the week before.
- The ADP Employment Change data for May came in substantially lower than the consensus call for a 173,000 increase against the previous reading of 192,000 in April. The actual number came in at 152,000 while the 192,000 from April got revised down to 188,000. Thus a softer actual print and a softer revision.
- At 13:45 GMT, S&P Global will release its final reading for the Services and Composite Purchasing Managers Index (PMI) for May. Services are expected to remain unchanged at 54.8. The Composite should come in at 54.4, in line with preliminary readings.
- At 14:00 GMT, the ISM releases the Services sector PMI for May:
- Services Employment component was at 45.9 in April, with no forecast available.
- New Orders index was at 52.2 in April.
- Headline Services PMI should jump back into expansion, seen at 50.5, from 49.4 in April.
- Prices Paid index was 59.2 in April, with no forecast available.
- Equities trade mixed on Wednesday, looking for some direction with mild losses or gains, though no real outliers to report in the European trading session.
- According to the CME Fedwatch Tool, Fed Fund futures pricing data suggests a 35.1% chance for keeping rates unchanged in September, against a 55.3% chance for a 25 basis points (bps) rate cut and a 9.6% chance for an even 50 bps rate cut. An interest rate hike is no longer considered an option since this week. For the upcoming meeting on June 12, futures are fully pricing in an unchanged result.
- The benchmark 10-year US Treasury Note trades around 4.33%, near its monthly low at 4.32%.
US Dollar Index Technical Analysis: ADP easing
The US Dollar Index (DXY)tries to recover for a second day all its losses that got booked on Monday. Although the US Dollar weakness looks to be trickling through more and more in the price action, the decline in the JOLTS report held another element that markets did not pick up on immediately. That is, employers, even with fewer job openings than in previous months and weeks, are still willing to pay higher salaries for the right people in the right job, which means that one of the main drivers in US inflation is still alive.
On the upside, the DXY first faces double resistance in the form of the 200-day Simple Moving Average (SMA) at 104.43 and the 100-day SMA at 104.42. Next up, the pivotal level near 104.60 comes into play. For now, the topside is forming around 105.00, with the 55-day SMA coinciding with this round number and the peak from recent weeks at 105.12.
On the downside, the Greenback is trading in that air pocket area in which the 104.00 big figure looks to be holding. Once through there, another decline to 103.50 and even 103.00 are the levels to watch. With the Relative Strength Index (RSI) still not oversold, more downsides are still under consideration.
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.
