US Dollar battles and gets favored by strong GDP revisions

US Dollar DXY trimmed losses after robust Q2 GDP figures
US economy appears to remain resilient but dovish bets on the Fed remain steady.
In the meantime, the Fed maintains a data-dependent stance and refrains from rushing into immediate cuts.

On Thursday, the US Dollar as presented by the DXY, experienced a mild surge after a stronger-than-expected Q2 Gross Domestic Product (GDP) report, balancing out previous losses and finding stability at 104.30. Despite this, the chances of a rate cut by the Federal Reserve (Fed) in September still remain high which appears to limit the upside to the Greenback.

The economic outlook for the US shows mixed signs but signals of impending disinflation make the market confident in a September cut by the Fed. Despite the pressure, bank officials remain reluctant to hastily implement cuts and maintain a data-dependent stance.

Daily digest market movers: US Dollar clears part of its daily loss after positive US Q2 GDP data

The US Gross Domestic Product (GDP) for the second quarter showed an expansion at an annual rate of 2.8%, according to the first estimate by the US Bureau of Economic Analysis, released on Thursday.
This positive reading, which exceeded the market expectation of 2%, follows a 1.4% growth reported in the first quarter.
Other data showed that Initial Jobless Claims for the week ending July 19, reported a better-than-expected figure of 235K.
On the negative side, June’s Durable Goods Orders saw a significant drop of 6.6%.
The CME FedWatch Tool continues to suggest a probable rate cut in September.

DXY Technical outlook: Bearish signs linger despite strong support around the 200-day SMA

Despite the potential headwinds, the DXY index oscillates around the critical 200-day Simple Moving Average (SMA) line, which provides significant support. In the meantime, bearish signals persist as, both the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) remain within the negative territory. The completed bearish crossover between the 20 and 100-day SMA on Wednesday provided an additional sell signal to the markets.

Key support levels are identified at 104.30 (200-day SMA) and 104.00 while resistance is expected around 104.50 and 105.00.

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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