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US Dollar steady after US PCE counteracts doom and gloom from US GDP miss

Republished By Plato
Republished By Plato

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  • US Dollar price action steadies after PCE data as both core and overall inflation fall in line of expectations. 
  • Initial and continuing claims point to a still strong jobs market. 
  • The US Dollar Index able to avoid a meltdown as PCE pushes back against weak data earlier this week. 

The US Dollar (USD) has lost its shine these past few days as the US Gross Domestic Product (GDP) and JOLTS decline issued alarm signals on the healthiness of the US economy. Though, it does not look to be a one way street, with the several data points this Thursday giving some arguments in favor of a stronger US Dollar. First and foremost, the US Personal Consumption Expenditures (PCE) numbers were in line with expectations and are still positive for the month, which proves that the US Federal Reserve (Fed) is right in its assessment not to start cutting soon.

Another counterargument in order not to start cutting that quickly comes with the continuing and initial jobless claims, which were still quite low. The initial jobless number is even contracting a bit, which means that companies are reluctant to let go of the excess workforce. So the demand for workforce might be slowing down a touch, the labor force as such is still seeing steady headcount stability or an increase, which means that inflation pressures will remain sticky for the next couple of months with plenty of Americans still earning money and have the ability to spend it.

Daily digest: US Dollar halts downturn

  • The White House asks Congress for a short-term extension of goverment funding in order to avert a shutdown during budget talks. 
  • Ahead of the US non-farm payrolls, Canadian payrolls rose 47.7K, from 129.9K.
  • The print of the Personal Consumption Expenditures (PCE) came in perfectly in line of expectations: The overall index stayed steady at 0.2% for the monthly performance, and jumped from 3% to 3.3% on a yearly basis. The core PCE for the month remained steady as well at 0.2%, while the core yearly index headed from 4.1% to 4.2%. 
  • Additionally, the Weekly Continuing and Initial Jobless Claims will came out at the same time with PCE: the Initial Claims went lower from 230K to 228K and the Continuing Claims nudged higher from 1.702M to 1.725M.
  • After a few days of silence, markets will get to hear from the Fed with Susan Collins from the Boston Fed due to speak at 13:00 GMT.
  • To close off the eventful day of economic data, the Chicago Purchasing Managers’ Index for August is expected at 13:45 GMT. The previous number was 42.8, which means it was already in contraction. So any further deterioration to the downside would be really market moving, while an uptick toward 50 would give a small shimmer of hope and might halt any further downturn in the Greenback. Expectations are for 44.1.
  • A very mixed trading day in the equity markets with Japan closing up 0.80%. Yet the Hong Kong Hang Seng Index is down 0.55%. Overall, European equities are roughly flat, and US equities are having difficulties chosing a direction.
  • The CME Group’s FedWatch Tool shows that markets are pricing in an 88.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September. The prior 78% probability was quickly reassessed after the downbeat data from the JOLTS report. 
  • The benchmark 10-year US Treasury bond yield trades at 4.10% and is quickly losing steam as markets move forward those possible rate cuts from the Fed. 

US Dollar Index technical analysis: Steady as of now until NFP

The US Dollar is in a technical recovery this morning, off the weekly lows against most major G10 peers. This could be short-lived as the current uptick is only based on the support of the 200-day Simple Moving Average at 103.08 in the US Dollar Index (DXY). In case that technical element is breached again, more substantial US Dollar devaluation could be in the cards. 

On the upside, 103.69, the high of August 30, comes into play as the level to beat in order to halt this downturn. Once that level is broken and consolidated, look for a surge to 104.00, where 104.35 (the peak of August 29) is an ideal candidate for a double top. Should the Greenback go on a tear, expect a test at 104.47 – the six-month high.

On the downside, the summer rally of the DXY is set to be broken as only one element now supports the US Dollar. That is the 200-day SMA, and it could mean substantially more weakness to come once the DXY starts trading further below it. The double belt of support at 102.35 with both the 100-day and the 55-day SMA are the last lines of defence before the US Dollar sees substantial and longer term devaluation. 

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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