- The US Dollar in the green against all its peers across the board.
- European PMI data projects issues ahead for Eurozone while German elections take place on Sunday.
- The US Dollar Index (DXY) reverses course and tries to head back to 107.00.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, is trading not far from 107.00 at the time of writing on Friday, after its earlier retreat on Thursday near 106.00. The Greenback claws back ahead of the United States (US) preliminary Purchasing Managers Index (PMI) data release for February. European data released earlier in the day already revealed a further slowdown in the economic activity in Europe.
The US economic calendar finally offers some data releases that might move the Greenback. The preliminary S&P Global Services PMI for February will be the main driver this Friday. Expectations are for a small uptick to 53 against 52.9 in the January reading. The University of Michigan will release its Consumer Sentiment Index and Inflation expectations as well for January’s final reading.
Daily digest market movers: US PMI data market moving
- In the early European trading session, the preliminary Purchasing Managers Index (PMI) data for February was already released in several European countries. What stood out:
- French HCOB Services PMI fell further into contraction to 44.5, missing the 48.9 estimate and contracting further from the previous 48.2.
- European HCOB Services PMI fell to 50.7, missing the 51.5 estimate and below the previous 51.3 reading.
- German HCOB PMIs beat estimates despite the Services component that came in at 52.2, missing the 52.5 estimate and below the January 52.5 reading.
- At 14:45 GMT US preliminary S&P Global PMI data for February will be released:
- The manufacturing sector is expected to tick up to 51.5, coming from 51.2.
- The services sector should tick up marginally to 53.0, coming from 52.9.
- The University of Michigan will release its final January reading at 15:00 GMT:
- The Consumer Sentiment Index should remain stable at 67.8.
- The 5-year Consumer Inflation Expectation index should rise steadily by 3.3%.
- Equities are shooting higher, led by the Chinese semiconductor sector. Chinese technology stocks surged the most in three years, driven by optimism over Alibaba Group earnings.
- The CME FedWatch tool shows a 47.5% chance that interest rates will remain unchanged at current levels in June.
- The US 10-year yield trades around 4.49%, slipping lower from its Wednesday’s high of 4.574%.
US Dollar Index Technical Analysis: Where is that promised parity?!
The US Dollar Index (DXY) is able to reclaim a little bit of room after another downbeat performance this week. The Euro (EUR) is helping out, with the partial recovery in the DXY index this Friday after some disappointing PMI releases, especially from France. If the US preliminary S&P Global PMI data for February, due this afternoon, shows some resilience for the country’s activity, the DXY could quickly be back up at 107.00.
On the upside, the previous support at 107.35 has now turned into a firm resistance. Further up, the 55-day SMA at 107.96 must be regained before reclaiming 108.00.
On the downside, 106.60 (100-day SMA) and 106.52 (April 16, 2024, high) have acted as an alert for buyers to step in and push the DXY back up. Further down, 105.89 (resistance in June 2024) will still hold as the next firm support level. The Relative Strength Index (RSI) momentum indicator in the daily chart still has not touched the oversold barrier. Therefore, the 200-day SMA at 104.98 could be a possible outcome if a firm catalyst emerges.
US Dollar Index: Daily Chart
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.
