US Dollar pops after Powell comments cause recalibration in Fed rate cut expectations – Crypto News – Crypto News
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US Dollar pops after Powell comments cause recalibration in Fed rate cut expectations – Crypto News

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  • The US Dollar sees overnight comments from Fed Chairman Powell trigger a change in US Dollar sentiment. 
  • In the Middle East, Israel has started its ground offensive in Lebanon, escalating tensions in the region. 
  • The US Dollar Index prints a four-day high ahead of ISM Manufacturing PMI data. 

The US Dollar (USD) trades firmly positive on Tuesday ahead of the Manufacturing Purchasing Managers Index (PMI) numbers from the Institute for Supply Management (ISM). The positive turnaround for the Greenback took place after traders priced in less interest rate cuts from the Federal Reserve (Fed) on the back of Chairman Jerome Powell comments. 

On the geopolitical side, Israel has started its incursion into Israel in what it calls “a limited ground offensive,” the Financial Times reports. Any further escalation of violence in the region could trigger safe-haven flows that generally tend to support the Greenback.

Looking at the economic calendar ahead, the ISM Manufacturing survey will be the main driver this Tuesday. Still, other elements will take up some attention as well. The JOLTS Job Openings report will give clues about how the demand for labor is evolving, while traders’ eyes and ears will need to be kept open as five Fed members are set to take the stage. 

Daily digest market movers: Powell dampens hopes for continous big cuts

  • Fed Chairman Powell left some remarkable comments overnight. One was that the Fed is even taking data into consideration for its upcoming policy meeting during its blackout period. This will make markets even more data dependent in the runup to the event.
  • Israel is carrying out a “targeted” ground offensive in Lebanon, while Hezbollah is firing back with artillery and rockets targeting Israeli soldiers near the town of Metula. The United Arab Emirates, meanwhile, has issued a statement expressing deep concerns over Israel’s ground operation, warning of repercussions of this dangerous situation for the region, Bloomberg reports. 
  • At 13:45 GMT, the final reading of the S&P Global Manufacturing Purchasing Managers Index (PMI) for September will be released. Economists expect the number to be unchanged from its preliminary estimate of 47. 
  • At 14:00 GMT, the ISM Manufacturing numbers for September will be released:
    • The headline PMI is expected to increase slightly to 47.5 from 47.2 a month earlier.
    • Among the main subindexes, the Prices Paid component is expected to ease to 53.5 from 54, while the Employment Index is expected to rise to 47 from 46. 
  • In the slipstream of ISM,  the JOLTS Job Openings for August will be released as well. Expectations are for a steady 7.670 million job openings against 7.673 million in July. 
    • Several Fed speakers will take the stage this Tuesday:
  • At 15:00 GMT, Federal Reserve Bank of Atlanta Raphael Bostic delivers welcoming remarks and moderates a conversation with Federal Reserve Board Governor Lisa Cook at the Technology-Enabled Disruption conference in Atlanta.
  • Near 22:15 GMT, Federal Reserve Bank of Richmond Thomas Barkin participates in a panel discussion with Atlanta Fed President Raphael Bostic and Boston Fed President Susan Collins at the Technology-Enabled Disruption conference in Atlanta.
  • European equities are looking for direction, unsure on whether a possible rate cut from the European Central Bank (ECB) in October needs to be considered positive or to be perceived as a sign on the wall that activity in the eurozone is deteriorating quickly. US Futures are trading flat ahead of the US opening bell. 
  • The CME Fedwatch Tool shows a 63.0% chance of a 25 basis-point rate cut at the next Fed meeting on November 7, while 37.0% is pricing in another 50-basis-point rate cut. 
  • The US 10-year benchmark rate trades at 3.75%, looking to test the three-week high at 3.81%.

US Dollar Index Technical Analysis: Six-day high

The US Dollar Index (DXY) gets help from Fed Chairman Jerome Powell, whose comments have eased market expectations of another big rate cut for the upcoming rate decision in November. Fewer odds for a bigger cut support the US Dollar, as it subdues performance from other currencies in the DXY basket such as the Euro (EUR). Markets are increasingly pricing in that the European Central Bank (ECB) might be set to deliver a surprise rate cut in October, which widens the rate differential in favour of a stronger US Dollar. 

The recovery looks to be a fierce one with the DXY already taking out four previous daily highs during Tuesday’s Asian trading. In case Dollar bulls can turn things further around, look at 101.90 for the next resistance level on the upside. Just above there, the 55-day Simple Moving Average (SMA) at 102.22 will come in. 

On the downside, 100.62 is flipping back from resistance into support, in case the DXY closes above it this Tuesday. The fresh low of 2024 is at 100.16, so a test will take place before more downside takes place. Further down, and that means giving up the big 100.00 level, the July 14, 2023, low at 99.58 comes into play.

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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