- The US dollar is at session lows against most major rivals.
- US President Trump made soft comments that tariffs may not ultimately be imposed on China.
- The US Dollar Index (DXY) is still trading below 108.00 despite a slight bounce from this week’s lows.
The US Dollar Index (DXY), which tracks the US dollar’s performance against six different major currencies, is emerging above 107.50 on Friday, despite still being surprised by comments from US President Donald Trump the previous day. Facing intraday losses. Doubt on imposing tariffs on China. Trump’s comments came after a phone conversation with Chinese President Xi Jinping. Meanwhile, the Bank of Japan (BOJ) raised interest rates by 25 basis points, causing significant losses for the US dollar (USD) against the Japanese yen (JPY).
On the economic data front, Markit has already released preliminary readings of Germany’s Purchasing Managers’ Index (PMI) for January, which showed some strong upbeat data, leading to a higher Euro (EUR) against the US Dollar (USD). Promote strength. Later this Friday, the US will receive its S&P Global PMI preliminary readings for the same month. The University of Michigan will conclude the day with the final readings of its Consumer Sentiment Index for January.
Daily Digest Market Movers: Will and can the US outperform?
- US President Donald Trump releases comments about his phone call with Chinese President Xi Jinping. According to Bloomberg report, he surprised the market by saying that he did not want to impose tariffs on China.
- According to Bloomberg report, US President Trump, while commenting on the Federal Reserve and US rates, confirmed that he will demand an immediate cut in US interest rates.
- Germany’s preliminary services PMI rose to 52.5 in January, beating the estimate of 51.0 and up from the previous 51.2. The composite PMI was able to break out of the contraction, reaching 50.1 and beating the expected 48.2 and the previous 48.0.
- At 14:45 GMT, the US will receive its PMI preliminary readings for January from S&P Global:
- Services are expected to decline to 56.5 from December’s final reading of 56.8.
- Manufacturing is expected to remain in contraction at 49.6, down from 49.4.
- At 15:00 GMT, the final reading of the University of Michigan consumer sentiment index for January is expected to be flat at 73.2. The 5-year inflation expectations component is also set to remain unchanged at 3.3%.
- Equities are mixed, with China and Europe in positive territory as markets downgrade Trump’s tariff risks. However, US stocks look sluggish and trading is flat.
- The CME FedWatch tool projects a 52.2% chance that interest rates will remain unchanged at current levels at the May meeting, suggesting a rate cut in June. Expectations are that the Federal Reserve (Fed) will remain reliant on data with uncertainties that could impact inflation during US President Donald Trump’s tenure.
- US 10-year yields are trading around 4.654%, down from their worst performance seen earlier this week at 4.528% and still a step back from last week’s high of 4.807% in more than a year. There is a long way to go.
US Dollar Index Technical Analysis: Is It Under Distribution
The US Dollar Index (DXY) is facing some setbacks and moving downwards along with US yields. Although US President Trump may suddenly soften his stance on tariffs, it is still too early in his term to rule out any tariff implementation on China and other countries. Risks are emerging, the market has started to underestimate the real trend, the US dollar may also see a rise if Trump imposes tariffs on China.
The DXY has its work cut out for it to reach levels seen earlier this week. First, there is a need to retest the big psychological level of 108.00. From there, 109.29 (July 14, 2022, high and rising trend line) is next to par the losses from this week. Before moving higher, the next upside level will be at 110.79 (September 7, 2022, high).
On the downside, the convergence of the October 3, 2023 high and the 55-day simple moving average (SMA) around 107.50 should act as a double protection feature to support the DXY price. For now, this looks to be holding, although there is still some scope for downside in the Relative Strength Index (RSI). Therefore, look at 106.52 or 105.89 as better levels for the US Dollar to gain momentum and seek a reversal.
US Dollar Index: Daily Chart
Central Bank FAQs
Central banks have a key mandate to ensure that there is price stability in a country or region. Economies are constantly experiencing inflation or deflation when the prices of certain goods and services are fluctuating. Continuously increasing prices of the same commodity means inflation, continuously decreasing prices of the same commodity means deflation. The job of the central bank is to keep the demand in line by changing its policy rate. For the largest central banks, such as 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%.
One important tool a central bank has for raising or lowering inflation is to change its benchmark policy rate, commonly known as the interest rate. At pre-communicated moments, the central bank will issue a statement with its policy rate and additional reasoning on why it is maintaining or changing (cutting or increasing) it. Local banks will adjust their savings and lending rates accordingly, making it either harder or easier for people to earn on their savings or for companies to take out loans and invest in their businesses. When the central bank increases interest rates significantly, it is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Central bank policy board members undergo a series of panels and hearings before being appointed to a policy board seat. Each member of that board often has a certain belief about how the central bank should control inflation and subsequent monetary policy. Members who want a very loose monetary policy with low rates and cheap credit, which would give the economy a significant boost while being content with seeing inflation slightly above 2%, are called ‘Doves’. Members who want to see higher rates to reward savings and keep an eye on inflation at all times are called ‘hawks’ and they will not rest until inflation is at or just below 2%.
Generally, there is a Chairman or President who leads each meeting, he is required to create consensus among the hawks or doves and he has the final say when it comes to vote division so that currently 50- A draw of 50 can be avoided. The policy should be adjusted. The Chairman will give speeches which can often be watched live, where the current monetary stance and outlook is being explained. A central bank will attempt to pursue its monetary policy without triggering violent fluctuations in rates, equities or its currency. All members of the central bank will direct their stance towards the market ahead of the policy meeting. Members are prohibited from speaking publicly until the new policy is communicated a few days before the policy meeting. This is called blackout period.
