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The US Dollar continues to trend upwards from late Friday.
Traders gear up for a very packed week with all eyes on the Fed decision due on Wednesday.
The US Dollar Index could break down from current levels at around the 200-day SMA.
The US Dollar (USD) is split in half with on the one hand the Greenback up against the import dependent nations and currencies like the eurozone (EURUSD), Scandinavia (USDSEK and USDNOK) and Central Europe (USDPLN). Meanwhile, oil rich countries such as Canada (USDCAD) and commodity exporters (AUDUSD and NZDUSD) are up versus the US Dollar. The moves comes with markets being in a cramp on the risk of US military forces being sent to the Red Sea area after three US military people were killed during a drone strick on an US base in Jordan.
On the economic front, some market-moving elements are coming out even before the Fed meeting, namely Tuesday’s JOLTS Job Openings data for December. On Wednesday, the US Federal Reserve rate decision and the speech by its Chairman Jerome Powell is due. Traders will need to keep some ammunition for other the main events on Thursday and Friday: The Institute for Supply Management (ISM) will release its Manufacturing PMI on Thursday, while Nonfarm Payrolls and the final University of Michigan Sentiment Index will be published on Friday to close off the week.
US defense said on Monday ahead of the US trading session, no battleplans are on the table and rather looks to defuse the tensions. The statement comes with markets expecting retaliation from the US after Iran hit a US military base in Jordan, left three US military people killed.
European Central Bank (ECB) member Luis de Guindos said that the Red Sea situation does not impact the next rate decisions for the ECB, according to Bloomberg. This contradicts comments from ECB President Christine Lagarde, who said last week during the rate decision meeting that the Red Sea situation could add to inflationary pressures and must be monitored.
Major Chinese construction group Evergrande has been deemed bankrupt and in default by a Hong Kong court. The ruling came after creditors didn’t reach a restructuring deal.
Red Sea risk is escalating again after several headlines were issued over the weekend of increasing violence between Houthi rebels and US forces.
At 15:30 GMT, the Dallas Fed Manufacturing Business Index for January will be released. The previous number was at -9.3.
The US Treasury will be placing a 3-month and a 6-month bill near 16:30 GMT.
Equity markets in Europe are looking for direction even after Asian indices closed in the green earlier this Monday. Japan saw both the Nikkei and the Topix close up nearly 1%. US Futures are flat or mildly in the red.
In the Earnings Season, big tech is due this week with Microsoft, Apple, Amazon and Meta to release their earnings this week as well.
The CME Group’s FedWatch Tool shows that markets are pricing in a 97.9% possibility for an unchanged rate decision on Wednesday, with a slim 2.1% chance of a cut.
The benchmark 10-year US Treasury Note trades near 4.10% and is showing small signs of a breakup in correlation with the US Dollar Index (DXY). Although there is some US Dollar strength at hand this Monday, the US bond market is not really following suit.
The US Dollar Index (DXY) is still stuck in a tight range between two very important moving averages: the 55-day (103.10) and the 200-day (103.51) Simple Moving Average (SMA). The turn of events and data last week proved not enough to push the US Dollar Index higher. Expect the Fed meeting and the US Jobs Report to be pivotal for the Greenback this week.
In case the DXY is able to run further away from the 200-day SMA, more upside is in the tank. Look for 104.41 as the first resistance level on the upside, in the form of the 100-day SMA. If that gets breached as well, nothing will hold the DXY from heading to either 105.88 or 107.20 – the high of September.
With the repetition of another break above the 200-day SMA, yet again, a bull trap could form once prices start sliding below the same moving average. This would see a long squeeze, with US Dollar bulls being forced to start selling around 103.10 at the 55-day SMA. Once below it, the downturn is open towards 102.00.
What does a central bank do?
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%.
What does a central bank do when inflation undershoots or overshoots its projected target?
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.
Who decides on monetary policy and interest rates?
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%.
Is there a president or head of a central bank?
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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