- The US Dollar is in the green, though marginally, while looking for direction.
- All eyes are on the other side of the Atlantic with the ECB meeting where Lagarde is set to take the stage.
- The US Dollar Index stronger as PPI and Retail sales surprise to the upside.
The US Dollar (USD) rallies as the Euro is taking a firm step back. Although the European Central Bank hiked 25 basis points, markets are crushing the Euro. Reason is that recent economic data pointed to a deteriorating economy, which now could even crash as the ECB sticks to getting inflation down to 2%, no matter what.
Meanwhile Producer Price data and Retail sales all soared higher above expectations. This points to even more the divergence between Europe and the United States: US is in the lane for a soft landing, while Europe is crashing. Question is how hard it will crash.
Daily digest: US Dollar outpaces Euro
- The main takeaway from the ECB meeting where Christine Lagarde spoke was a very nervous ECB president who refrained responding to the question if the ECB is done hiking now. The ECB has hiked as it was undershooting its attempt to get inflation to 2% by 2025. It became clear that the decision was not an easy one and that there was a vote split on wether to hike or not.
- Just minutes after the ECB central bank decision, Spanish Economic minister Nadia Calviño, came out demanding it will be the last rate hike from the ECB as Spanish economic indicators are deteriorating quickly.
- Just hours before the ECB rate decision, the Chinese People’s Bank of China (PBoC) has cut its Reserve Requirements Ratio by 0.25%. The Yuan eases a touch against both Euro and US Dollar. The cut was expected by analysts and does not trigger any big market movements.
- Big fireworks are expected on Thursday from both the macroeconomic and central bank corners.
- The European Central Bank hiked 25 basis points to 4%.
- The Producer Price Index (PPI) jumped in all components above expectations. Aspecially the final PPI went from 0.3% to 0.7% on a monthly basis. On the yearly basis, overall went from 0.8% to 1.6%. Without Food and energy, the monthly level went from 0.3% to 0.2%, and yearly from 2.4% to 2.2%.
- Retail Sales went lower, while revisions went lower as well, pointing to substancial support. The Retail Sales overall went from 0.7% to 0.6% with the previous revised to 0.5%. Without car and gas, sales went from 1.0% to 0.2%, with the latest revised to 0.7%.
- The macroeconomic calendar will end its day near 14:00 GMT, with US Business inventories data for July. Expectations are from a small 0.1% increase after stagnating in June..
- Asian equities are overperforming this Thursday, with both Japanese and Chinese indices in the green. European equities went higher on Wednesday after head of the European Commission President Ursula von der Leyen issued new rules which will support local EV car builders and make it more difficult for China to dump cheap EV-cars in the bloc.
- The CME Group FedWatch Tool shows that markets are pricing in a 97% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September after the recent US inflation numbers.
- The benchmark 10-year US Treasury bond yield trades at 4.25% and is taking a small step back as the volume of new debt issuances is slowing down a touch.
US Dollar Index technical analysis: Euro pushes DXY above 105
The Greenback’s moves on Thursday will largely depend on where the Euro will head to. The ECB rate decision will have a binary impact on the US Dollarindex (DXY) once all data is out and markets have decided if the ECB rate decision was hawkish or dovish. Expect to see a very volatile window between 12:00 GMT and 14:00 GMT with possibly no real direction to be found until after all the dust has settled.
The new high to watch is at 105.16, both the high from last Thursday and a six-month high. The US Dollar Index first needs to gain back its lost territory from this Monday and break above the high of 104.93. Beyond 105.16, the next level to watch is 105.88, the high of 2023.
On Monday, 104.44 kept it together and refrained from allowing the DXY from selling off any further. The high of August 25 did its job and acted as a pivotal level. Should the uptick from this Tuesday reverse and 104.44 gives way, a substantial downturn could take place to 103.04, where the 200-day SMA comes into play for support.
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.