- The US Dollar sees some profit taking after German PMIs came in stronger than expected.
- The risk-off tone for this week is being put on hiatus for now, with European and US equities being on the front foot.
- The US Dollar index slides lower, in search of support after touching an almost three-month high on Wednesday.
The US Dollar (USD) retreats this Thursday against most major currencies, ahead of a more busy day in terms of US data releases, with the Purchasing Managers Indices (PMI) data for October as the main event. Earlier on Thursday, the European PMIs came in mixed, with France contracting further in all sectors and Germany posting better-than-expected readings. Still, except for the German Services PMI, all readings for both countries – which are the Eurozone’s largest economies –remain in contraction territory.
The US calendar will also offer the PMI data, which will give insight about the state of the economy. Apart from these, the weekly Jobless Claims figures and both the Chicago Fed and Kansas City Fed activity trackers will create some additional volatility.
Daily digest market movers: US PMI could set to the tone for the rest of the week
- In European trading, both France’s and Germany’s prelimenary Purchase Manager’s Index numbers for October came out: For France, Services fell to 48.3, coming from 49.6 in September and missing the 49.9 estimate. Germany’s Services component is the last man standing for the two biggest European economies that is growing. The German Services PMI came in at 51.4, beating the 50.6 estimate and surging from the previous 50.6 in September.
- Thursday’s calendar kicks off at 12:30 GMT with the Chicago Fed National Activity Index and the weekly Jobless Claims numbers. Initial claims are expected to tick up to 242,000 from 241,000 last week.
- At 13:45 GMT, S&P Global will release its preliminary readings for the October PMIs:
- The Services PMI is expected to remain broadly stable at 55.0 from 55.2 in September.
- The Manufacturing PMI should pick up, though remain in contraction at 47.5 against 47.3 previously.
- The Composite reading stood at 54.0 in September, no forecast is available for October.
- At 15:00 GMT, the Kansas Fed Manufacturing Activity tracker for October will come in. There is no consensus view available, and the previous reading was at -18.
- The equities world turns upside down on Thursday, with China being the laggard for the first time this week while European and US equities are finally posting some gains.
- The CME Fedwatch Tool is backing a 25 basis point (bps) rate cut with an 93.0% probability against an 7.0% chance of no rate cut for the upcoming Fed meeting on November 7.
- The US 10-year benchmark rate trades at 4.19% and is trading off its high from 4.24% seen Wednesday.
US Dollar Index Technical Analysis: Half time before final quarter
The US Dollar rally, measured by the US Dollar Index (DXY), is taking a breather. Like with everything in financial markets, there is never a straight line for multiple trading sessions in a row, and a breather to cool down the rally a bit is more than welcome. Do not be surprised to see a bit of a turnaround as markets are still very much positioned for more US Dollar strength ahead of the upcoming US elections on November 5.
The DXY has broken above 104.00 and is in an empty area that could quickly see 105.00 emerge as the first cap on the upside. Once above that level, watch out for the pivotal 105.53 (April 11th high) and 105.89 (May 2nd high). Ultimately, 106.52 (double top April) or even 107.35 (October 3rd, 2023 high) could show sharp resistance and selling pressure with profit taking on the rally to materialize at these levels.
On the downside, the 200-day SMA at 103.81 emerges as very strong support. Look out for false breaks, and consider waiting for a daily close below that level when reassessing if there will be more downside for the DXY. The next big support is double, with the 100-day SMA at 103.19 and the pivotal 103.18 level (March 12 high). If that level breaks, a big gap lower would occur to the 101.90 support zone, with the 55-day SMA at 101.93.
US Dollar Index: Daily Chart
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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