Market Data 
- US Dollar Index remains unchanged following the release of mixed inflation data.
- Inflation in the US declined to 2.5% on an annual basis in August.
- Annual core CPI remained steady at 3.2% in August.
- The market reaction includes a higher probability of a 25-basis-point cut by the Fed.
The US Dollar Index (DXY), a measure of the value of the USD against a basked of six other currencies, lost its ground after the release of mixed inflation data for August. Despite a decline in the overall inflation rate to 2.5% on an annual basis, the core Consumer Price Index (CPI) remained steady at 3.2%, indicating persistent inflationary pressures. This data has dampened expectations of a 50-basis-point interest rate cut by the Federal Reserve (Fed) in September, increasing the likelihood of a more modest 25-basis-point reduction.
Based on economic indicators, the US economy remains robust, surpassing expectations. While the market anticipates further monetary relaxation, it is essential to temper expectations. The current growth trajectory is unlikely to warrant such aggressive easing measures. It is crucial to adopt a balanced approach, acknowledging both the economy’s strength and the need for cautious optimism in decision-making.
Daily digest market movers: DXY flat after CPI figures
- Annual US CPI inflation eased to 2.5% in August from 2.9% in July, marking the lowest level since April 2018.
- Annual core CPI, excluding volatile food and energy prices, remained unchanged at 3.2% in August, as expected.
- Monthly CPI increased 0.2%, while core CPI was up 0.3%, both above market expectations.
- As a reaction, the US Dollar is seen flat as traders reduced odds for a 50-basis-point rate cut by the Fed, now pricing in an 85% chance of a 25-basis-point cut.
Daily digest market movers: DXY threatens the 20-day SMA
Technical analysis for the DXY index shows that indicators are currently in a negative territory but seem to have flattened. However, the index managed to regain the 20-day Simple Moving Average (SMA) at around 101.60 on Tuesday, which improved the short-term outlook.
The Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) are both flat in negative terrain, which suggests that there is no bearish threat. That being said, on Wednesday, the upside appeared to be limited, but buyers have more room to continue advancing.
Key support levels include 101.60, 101.30 and 101.00, while resistance levels include 101.80, 102.00 and 102.30.
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.
