- The US Dollar trades higher after the prelimenary December PMI data got released.
- Traders rejoice with the Services PMI beating the previous number and the estimate.
- The US Dollar Index (DXY) moves back above 107.00 and heads to 107.35.
The US Dollar (USD) is popping higher on Monday after a rather downbeat day. The turnaround comes on the back of a very upbeat release in the preliminary S&P Global Services Purchase Managers Index (PMI) release for December. A print of 58.5 against the previous 56.1 and the concensus 55.7 is smashing it out of the park and is providing the needed tailwind for the Greenback to get out of its disappointing performance earlier this Monday.
The first move on Monday was initiated after Chinese Retail Sales came in at 3.0% for November, below analysts’ lowest estimate of 4.2% and far below the median estimate of 5.0%. Clearly, the stimulus measures the Chinese government has implemented are not having the impact markets expected them to.
Meanwhile, preliminary S&P Global and Hamburg Commercial Bank (HCOB) Purchase Managers Index (PMI) data for December have been released for European countries and the Eurozone. Overall, manufacturing is sinking further into contraction in both France and Germany. The sole outlier is German Services, which is popping back into expansion at 51.0 against the 49.3 expected.
German Chancellor Olaf Scholz will be able to use that last data point in his favor during his scheduled meeting at the Bundestag later this Monday, where the chancellor is facing a vote of no confidence. If he loses, the German government will fall, following France’s, with snap elections set to take place possibly on February 23.
Daily digest market movers: PMI difference between Euro and US bigger again
- China’s Retail Sales data for November missed market estimates by coming in at 3.0% year-over-year, whereas 4.6% was expected, pushing the Greenback higher against the Chinese Yuan (USD/CNH).
- The surprise upbeat German Services PMI, combined with the possibility of an announcement about German snap elections, is pushing the Euro higher against the US Dollar (EUR/USD).
- At 14:45 GMT, the US preliminary S&P Global PMI data for December got released:
- Services PMI jumped to 58.5, beating the 55.7 estimate and quite far above the previous 56.1.
- The Manufacturing component fell further into contraction by 48.3, below the 49.4 estimate and the previous 49.7 print.
- The services component will be the leading element, with a weaker US Dollar should services shrink substantially, whereas an upbeat number would trigger more US Dollar strength across the board.
- Equities are split with Euro lagging while the S&P Global Services PMI release fires up US equities. The Nasdaq is leading the charge by heading nearly 0.70%.
- The CME FedWatch Tool is pricing in another 25 basis points (bps) rate cut by the Fed at the December 18 meeting by 97.1%.
- The US 10-year benchmark rate trades at 4.39%, just a sigh below the 4.40% from last week.
US Dollar Index Technical Analysis: The gap between Europe and US just got bigger
The US Dollar Index (DXY) shows signs of fatigue, with price action slowing down and starting to trade sideways. Traders feel comfortable with what has been priced in and are probably awaiting anything else until President-elect Donald Trump takes office or should US data fuel any move. The uncertainty on which measures Trump will put in place and which are just threats used as bargaining chips could keep the DXY in a chokehold until late January.
On the upside, 107.00 remains a key level that needs to be reclaimed before considering 108.00. When and if that finally happens, the fresh 2-year high at 108.07, recorded on November 22, is the next level to watch for.
Looking down, 106.52 is the new first supportive level in case of profit-taking. Next in line is the pivotal level at 105.53 (the April 11 high), which comes into play before heading into the 104-region. Should the DXY fall towards 104.00, the 200-day Simple Moving Average at 104.19 should catch any falling knife formation.
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.
