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US Dollar secures weekly gains after eventful week

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  • Despite weak sentiment data, USD rides high on hawkish Fed bets.
  • CPI data reported this week made hopes of a June cut unlikely.
  • Fed’s Collins and Goolsbee were on the wires sounding hawkish.

The US Dollar Index (DXY) is trading above the 106.00 mark, attaining its highest level since early November. The Index's upward movement is largely driven by rising US yields and a hot inflation data environment that favors the US Dollar. In addition, Federal Reserve (Fed) officials expressed fewer possibilities for rate cuts this year, and an increase in hawkish bets is another driver boosting the currency. 

On Wednesday, inflation measured by the US Consumer Price Index (CPI) accelerated in March, which made US Treasury yields rally, and markets are now expecting a more aggressive Fed.

Daily digest market movers: DXY shrugs off weak sentiment data on the back of hawkish bets

  • Early April saw a decrease in US Consumer Confidence as indicated by the University of Michigan's Consumer Sentiment Index, which fell to 77.9 from March's 79.3, shyer than anticipated.
  • Decreases were recorded in Sentiment Indices for both Current Conditions and Consumer Expectations, falling to 79.3 and 77 from 82.5 and 77.4, respectively.
  • On Wednesday, the Consumer Price Index (CPI), reported by the US Bureau of Labor Statistics, rose to 3.5% YoY in March, a jump from February's 3.2%. The core CPI also accelerated.
  • Because of heightened inflation figures, there is increased anticipation of a hawkish response from the Fed, which has led to a rise in US Treasury bond yields, subsequently strengthening the US Dollar (USD).
  • Susan Collins, from the Boston Fed, pointed out that only two rate cuts could happen this year. Austan Goolsbee also warned that the Fed might take action if Personal Consumption Expenditures accelerates.
  • The Odds of a July cut are reportedly less than 60%, a decrease from the prior 99% chance before the inflation data were publicized. The odds for a second rate cut happening in December stand at 75%.
  • The market's hopes for a June rate cut also declined to around 20%.

DXY technical analysis: DXY bullish as momentum indicators favor buyers, correction likely

The indicators on the daily chart reflect a favorable buying momentum. The Relative Strength Index (RSI), with its positive slope and placement in positive territory, suggests that bulls are gaining ground in the currency price action. However, the RSI stands now in overbought terrain, which may hint that a correction is incoming. 

Meanwhile, the Moving Average Convergence Divergence (MACD) also supports this bullish view as the green bars on the histogram show an upward trajectory, indicating that buyers are in control. 

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.

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