- The US Dollar appreciates throughout the day and ekes out big gains.
- Traders see the Fed confirming market projections on cutting cycle for 2025.
- The US Dollar Index breaks out of its 103.00 – 104.00 range for the first time in weeks.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, rallies above 104.00 on Thursday after the weekly jobcless claims data. Borrowing costs were kept unchanged overnight by the Federal Reserve (Fed), and projected two interest rate cuts for 2025. During Wednesday’s Fed meeting, Chairman Jerome Powell said that any tariff-driven bump in inflation will be “transitory.” However, he added later that it will be very challenging to say with confidence how much inflation stems from tariffs versus other factors. He also said recession odds have moved up, though are not high, Bloomberg reports.
Meanwhile US yields are plunging lower with investors heading into US bonds. The prospects of yields set to decline once the Fed starts cutting, sees a flight into the safe haven asset. That together with the geopolitical uncertainty as clearly a quick ceasefire for Ukraine is out of the cards and geopolitical tensions are heightened in Turkey and Gaza, makes sense that the safe haven US bonds are favoured again.
Daily digest market movers: Bonds are bid
- At 12:30 GMT, the most important data for this Thursday was released:
- US Initial Jobless Claims ticekd up to 223,000, coming from 221,000. The US Continuing Jobless Claims came in at 1,892 million against 1,859million last week.
- The Philadelphia Fed Manufacturing Survey for March fell to 12.5, better than the expected 8.5 and from the previous 18.1.
- At 14:00 GMT, US Existing Home Sales month-on-month for February will be released. Expectations are for a contraction to 3.95 million compared to 4.08 million the previous month.
- Equities are struggling with European indices facing big profit-taking. The German Dax is down over 1%, while US futures are starting to roll over.
- According to the CME Fedwatch Tool, the probability of interest rates remaining at the current range of 4.25%-4.50% in May’s meeting is at 80.5%. For June, the odds for borrowing costs being lower stand at 71.1%.
- The US 10-year yield trades around 4.19%, heading back to its five-month low of 4.10% printed on March 4.
US Dollar Index Technical Analysis: Yields squeeze
The US Dollar Index (DXY) is trying to break out of a short-term technical descending triangle pattern. The tilted side of a triangle should act as strong resistance while the flat base of the triangle at 103.18 should act as strong support. Normally, the textbook logic is that sellers will build up positions alongside the tilted descending trend line in order to break through that flat base, which will result in more downturn.
The fact that currently the DXY is trying to break out of that pattern could be a sign for a turnaround, though heavy resistance is awaiting just around the corner at 104.00.
If bulls can avoid a technical rejection at 104.00, a large sprint higher towards the 105.00 round level could happen, with the 200-day Simple Moving Average (SMA) converging at that point and reinforcing this area as a strong resistance. Once broken through that zone, a string of pivotal levels, such as 105.53 and 105.89, could limit the upward momentum.
On the downside, the 103.00 round level could be considered a bearish target in case US yields roll off on deteriorating US data, with even 101.90 on the table if markets further capitulate on their long-term US Dollar holdings.
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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