US Dollar steady ahead of US opening and Chicago PMI

Most Recent Article: US Dollar back under pressure on last trading day of 2023

The US Dollar trades flat after its recovery in the close at the US session on Thursday.
Equity markets are set to close off the year on a high note. 
The US Dollar Index pops back above 101, though flirts with a final close below it. 

The US Dollar (USD) is trading sideways for now on this last Friday of the year and the very last trading day of 2023. Looking back at its performance overall for this year, the Greenback has lost only around 3% Year-To-Date on the US Dollar Index (DXY) chart since its first opening in January. The big theme for 2024 going forward looks to be whether markets have been too eager to price in rate cuts for the US Federal Reserve, or has the Fed lost its control and made a policy error? 

On the economic front, traders can scalp the last pips of profit with the Chicago Purchase Managers Index (PMI) coming out this Friday. The Jobless Claims numbers from Thursday already triggered a small turnaround for the DXY. Should this Friday’s PMI numbers stay above 50 and even beat the expectation, the Greenback might make good on some earlier losses from this week. 

Daily digest Market Movers: Geopolitics and rate cuts for 2024

Last data point for 2023 is printed near 14:45 GMT with the Chicago Purchase Managers Index. Expected is a decline from 55.8 to 51. A drop below 50, would mean contraction and will be substantially US Dollar negative, while either a beat of expectations or a print above the previous might see a very steep US Dollar rally in its turn. 
On the geopolitical front Russia has started a new missile offensive against Ukraine with several key cities being bombarded, casualties rising by the hour. 
Former US President Donald Trump will be placed back on the primary ballot in Colorado, though he is barred in the US State of Maine for the Primaries in March. 
Equities are extending the Christmas spirit and are trying to eke out those last percentage points of gains. 

Officially Japan has already closed off for this year and saw the Topix close up near 28% for 2023. The Topix closed off just above 25% for 2023.
In China the Hang Seng Index was a bit of a let down for 2023, with the Index closing off down 13.82% for 2023.
In Europe the German Dax is currently up over 0.25% for this Friday with a nice 20% return for 2023.
In the US, Futures are all flat for this Friday, putting the Christmas rally on hold before going in the New Year. Overall for 2023, the Dow Jones is near 13% in the green for its overall performance, the S&P 500 near 25% profit and the Nasdaq around 44% gains. 

The CME Group’s FedWatch Tool shows that markets are pricing in an 83.5% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 16.5% expect the first cut already to take place. 
The benchmark 10-year US Treasury Note trades near 3.87%, off the lows and sees a bit of a squeeze to the upside since Thursday.

US Dollar Index Technical Analysis: Will the DXY rebound?

The US Dollar Index is having a change of heart on this last day of 2023. The window of opportunity is closing for traders who were short the Greenback and want to cash in on this rally. Expect to see some more US Dollar strength filter in on this last day of 2023, with traders starting to trigger more demand of US Dollar to cash in on their positions and start with a clean sheet in 2024.

First upside resistance to face is near 101.78 at the low of December 21. Although a long way to go, it looks not unthinkable that the DXY might test the descending trend line near 103.00. Depending on the catalyst that fuels the recovery in the Greenback, the 200-day Simple Moving Average (SMA) near 103.45 is firm last resistance before having more upside. 

To the downside, the pivotal level at 101.70 – the low of August 4 and 10 – is now gone and holds no bearing anymore for support as it is too badly beaten up. The new support, near 100.82, aligns with the bottoms from February and April, and could still hold some relevance – it might hold for this Friday. Should that level snap, however, nothing will stand in the way of DXY heading to the sub-100 region. 

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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