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- The US Dollar trades stable in a tight range on Monday.
- Traders brace for a historic week ahead with no less than five major central banks communicating on their monetary policy.
- The US Dollar Index trades around the mid 103.00s and is expected to remain steady.
The US Dollar (USD) is having a Zen moment on Monday before this week’s turmoil is set to pick up with no less than five central banks set to issue rate policy statements. The first most important one will be the Bank of Japan (BoJ) rate decision on Tuesday and the second one the US Federal Reserve rate decision on Wednesday. Both meetings will be crucial: The BoJ is set to leave decades of negative interest rate policy while trying not to disrupt markets, and the Fed will give clues over the interest-rate outlook after the recently hot inflation numbers made markets nervous.
Monday’s US economic calendar is light. For more pivotal data points, look at Thursday with the preliminary Purchasing Managers Index (PMI) data for March. Right at the end of the week no less than three Fed members, Fed Chairman Jerome Powell included, will deliver speeches and statements that could further guide markets in case the rate decision on Wednesday was not clear enough for markets.
Daily digest market movers: Central Banks!
- Vladimir Putin has secured another term as Russian President on Sunday. Despite comments from Putin that peace talks with Ukraine will not take place, China has said it wants to start peace talks.
- The BoJ is expected to steer its policy rate away from negative rates for the first time in decades. Markets seem to be broadly anticipating the move, with Japanese equity markets rallying over 2% ahead of the meeting overnight on Tuesday.
- Other central banks this week are the Reserve Bank of Australia (RBA) on Tuesdsay, the Swiss National Bank (SNB) on Thursday together with the Bank of England (BoE).
- The People’s Bank of China (PBoC) made a surprise stronger USD/CNY fixing on Monday at 7.0943 while 7.1993 was expected. This comes after analysts thought the PBoC was letting loose on its stronger fixing after a surprise weaker exchange rate on Friday. Currency markets are not really reacting to the fixing.
- Monday’s US data calendar kicks off at 14:00 GMT with the NAHB Housing Market Index for March. February was in contraction at 48, and the same reading is expected for March.
- The US Treasury Department will allot a 3-month and a 6-month bill at 15:30 GMT.
- Equities are opening the week in the green across the board. Special notice for the Japanese Nikkei and Topix, both up over 2% for this Monday.
- According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the March 20 meeting are at 99%, while chances of a rate cut stand at 1%.
- The benchmark 10-year US Treasury Note trades around 4.30%, continuing its ascent from last week.
US Dollar Index Technical Analysis: Brace for the (un)known
The US Dollar Index (DXY) is facing two main events this week which could see a surge in volatility for the Greenback, though with the risk of standing still at the end of the rollercoaster ride. Although the BoJ is set to deliver a game-changing rate decision and the Fed will need to be more clear to ease the nervousness in the market, it could actually not move the needle that much on the charts.
The BoJ rate change has been overly communicated and commented on since December last year, while markets have grown accustomed to the constant repricing of when that initial rate cut from the Fed could take place.
On the upside, the 55-day Simple Moving Average (SMA) at 103.46 is facing some pressure again, likewise with Friday. Not far above, there is a double barrier with the 100-day Simple Moving Average (SMA) near 103.63 and the 200-day SMA near 103.70. Depending on the catalyst that pushes the DXY upwards, 104.96 remains the key level on the topside.
Should both central bank meetings turn into a non-event, expect to see some easing in the US Dollar. In this scenario, the downside looks inevitable once markets move forward again to price in a Fed rate cut for June, with 103.00 and 102.00 up next. Once through there, the road is open for another leg lower to 100.61, the low of 2023.
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.
