US Dollar advances despite lower GDP revisions

US Dollar advances despite lower GDP revisions
  • DXY index is showing gains, currently standing at 103.90, after hitting a high of 104.20.
  • The second estimate of Q4 US GDP came in at 3.2%, lower than expected.
  • Expectations of the Fed delaying cuts favor the Greenback.

The US Dollar Index (DXY) is trading around 104.00, experiencing its first significant rise since mid-February after hitting 104.20 earlier in the session. This increase can largely be attributed to a decline in foreign currencies in response to a dovish hold by the Reserve Bank of New Zealand (RBNZ), which seems to be overshadowing soft Q4 Gross Domestic Product (GDP) revisions from the US.

Meanwhile, the US Federal Reserve (Fed) maintains a notably consistent, reluctant stance on cutting rates prematurely, signaling a hawkish bias via its officials. Market sensitivity to this stance has reduced expectations of an imminent rate cut, with odds for March at zero, May at 20%, and June around 50%. This seems to be providing a cushion for the Greenback. 

Daily digest market movers: US Dollar gains as markets push back rate cut outlook

  • The US reported that the GDP annualized growth rate was revised down to 3.2%, slightly below the consensus of 3.3%.
  • To continue placing bets on the next Fed decisions, market participants are now awaiting the release of the Personal Consumption Expenditures (PCE) Price Index due on Thursday.
  • Market expectations for the Fed’s decisive actions have converged. The market now anticipates only 75 bps of total easing in 2024, down from 150 bps at the start of the year, and this aligns with the Fed’s rate projections. 

Technical analysis: DXY bulls gain some ground, but must conquer 20-day SMA

On the daily chart, the Relative Strength Index (RSI) shows a positive slope in positive territory, indicating buyers have started gaining momentum. Nonetheless, bulls  struggle to capture further ground, suggesting a possible exhaustion in their momentum.

The Moving Average Convergence Divergence (MACD) reflects a set of decreasing red bars. This tells us that, despite the buyer’s force in the market, there is a palpable selling pressure visible. Looking at the Simple Moving Averages (SMAs), the index is beneath the 20-day and 100-day SMAs, affirming the short-term bearish outlook. Conversely, its position above the 200-day SMA implies that bulls are maintaining their strength in the grander time frames.

In summary, the current technical indicators suggest a precarious balance between buying and selling forces with a short-term bearish bias, which might be starting to wane. However, the long-term view remains bullish, evidenced by the pair’s stance above the 200-day SMA. 

Central banks FAQs

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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