US Dollar stands neutral despite the report of soft economic data

The DXY index first declined to 104.00 and then jumped back to 104.30.
Jobless Claims accelerated in the first week of November, while Industrial Production from October disappointed. 
The mix of the labor market cooling down and inflation retreating is making investors believe Fed rate hiking cycle is over.

The US Dollar (USD) traded flat on Thursday and rotated within the 104.00 to 104.30 range. The USD remains pressured as markets place additional bets on the Federal Reserve (Fed) being less aggressive than expected after weak Jobless Claims and Industrial Production figures from the US.

The United States economy is showing signs of cooling down with a weakening labor market and inflation retreating, which makes it highly unlikely that the Federal Reserve (Fed) will raise interest rates at the upcoming December meeting. That being said, the bank will receive additional CPI and Nonfarm Payrolls reports before its last decisions of 2023, which could impact whether they ultimately decide to hike or not.

Daily Digest Market Movers: US Dollar struggles to gather momentum after weak data

The US Dollar Index recovered to 104.30 from a low of around 103.98 and stands at its lowest point since September.
During the week ending November 11, the number of US Initial Jobless Claims increased to 231,000, surpassing the predicted 220,000.  
The Philadelphia Fed Manufacturing Index slightly improved, reaching -5.9 instead of the expected -9 points. 
Industrial Production in the United States fell short of expectations, experiencing a 0.6% MoM decline, higher than the -0.3% expected. It also tallied a year-on-year decrease of 0.7%.
US Treasury yields extended their decline, with the 2-year rate increasing to 4.86%, while the 5 and 10-year rates rose to 4.43% and 4.43%, respectively.
According to the CME FedWatch Tool, the odds of a 25-basis-point hike in December are zero. Markets are betting on rate cuts appearing sooner than expected in May 2024, if not March.

Technical Analysis: US Dollar bulls do battle and defend 100-day SMA

The daily chart suggests that the DXY has a neutral to bearish technical outlook, with bulls having lost significant ground this week and struggling to gather momentum. The Relative Strength Index (RSI) points south below 50, while the Moving Average Convergence Divergence (MACD) histogram exhibits larger red bars.

Zooming out, despite the bears gaining ground and pushing the index below the 20-day Simple Moving Average (SMA), the bulls are defending the 100-day average, indicating that if the sellers fail to conquer it, the outlook will still be positive in the larger context.

Support levels: 104.15 (100-day SMA),103.60 (200-day SMA), 103.30.
Resistance levels: 104.50, 105.00,105.30.

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.

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