- The US dollar stabilized on Wednesday after two days of losses.
- Markets are measuring the impact of the 10% tax on Chinese goods announced by President Trump on Tuesday.
- The US Dollar Index (DXY) is testing the 108.00 mark and is set to head to the lower end at 107.00.
The US Dollar Index (DXY), which tracks the value of the dollar against six major currencies, went nowhere and consolidated below the 108.00 mark in the European trading session on Wednesday. However, selling pressure continued after US President Donald Trump issued further comments about a potential 10% tax on all Chinese imports on Tuesday. Even Europe has been targeted, although discussions about tariffs appear to be ongoing.
Meanwhile, the US economic calendar remains very light. While Federal Reserve (Fed) officials are still in a blackout period ahead of the policy decision scheduled for January 29, traders focused on Mortgage Bankers Association (MBA) orders for the week ending January 17 on Wednesday. Last week’s 33.3% rise was astonishing, to say the least, and traders are curious to see if Trump’s influence is also being reflected in the mortgage market.
Daily summary of market drivers: what’s next
- The Mortgage Bankers Association on Wednesday released its weekly mortgage survey, which saw a very slight 0.1% increase in applications in the week ending January 17 compared to the previous week’s reading of 33.3%.
- Stocks pare gains on Wednesday. European stocks are broadly in the green, while US futures rose near 0.50% on average.
- The CME FedWatch tool forecasts a 55.7% chance that interest rates will remain unchanged at current levels at the May meeting, suggesting a rate cut in June. Expectations indicate that the Federal Reserve (Fed) will remain data-reliant with uncertainty that may impact inflation during US President Donald Trump’s term.
- The US 10-year bond yield is trading at around 4.56% on Wednesday and has a long way to recover if it wants to return to last week’s peak near 4.75%.
US Dollar Index Technical Analysis: What When Economic Data Turns?
The US Dollar Index (DXY) fell further as selling pressure continued. It is not that tariffs lead to a correction in the US dollar. Instead, communication is very unclear and foggy, with many balloons left hanging in the air, although nothing concrete has been implemented at the moment.
If the recovery in DXY wants to continue its rise, the pivot level to control is 109.29 (July 14, 2022, high and rising trend line). Furthermore, the next big upside to reach before advancing further remains at 110.79 (September 7, 2022 high). Once above that level, it extends all the way to 113.91, a double top as of October 2022.
On the downside, the first area to watch is 107.80-107.90, which holds this week’s correction. In the event of further decline, the convergence between the October 3, 2023 high and the 55-day simple moving average (SMA) around 107.40 should serve as a double safety feature to catch any falling knives.
US Dollar Index: daily chart
Central banks questions and answers
Central banks have the main task of ensuring that prices in a country or region are stable. Economies constantly experience inflation or deflation when the prices of certain goods and services fluctuate. A continuous rise in prices for the same goods means inflation, and a continuous fall in prices for the same goods means deflation. It is the responsibility of the central bank to maintain demand by adjusting the interest rate. For the largest central banks such as the US Federal Reserve (Fed), the European Central Bank (ECB), or the Bank of England (BoE), the mandate is to keep inflation near 2%.
The central bank has one important tool at its disposal to raise or lower inflation, and that is by adjusting its benchmark interest rate, known as the cash rate. At the moments announced in advance, the central bank will issue a statement on its interest rate and provide additional reasons as to why it will remain or change (lower or raise). Local banks will adjust their savings and lending rates accordingly, which in turn will make it harder or easier for people to earn their savings or for companies to obtain loans and make investments in their businesses. When a central bank raises interest rates significantly, this is called monetary tightening. When the benchmark interest rate is lowered, it is called monetary easing.
The central bank is often politically independent. Members of the central bank’s policy board go through a series of committees and hearings before being appointed to a policy board seat. Each member of this board often has a certain conviction about how the central bank should control inflation and subsequent monetary policy. Members who want very loose monetary policy, with low interest rates and cheap lending, to boost the economy significantly while being content to see inflation just above 2%, are called “doves.” Members who want to see higher interest rates to reward savings and want to keep inflation down at all times are called “hawks” and will not rest until inflation reaches 2% or just below.
Usually, there is a chair or chair who leads each meeting, needs to create consensus among the hawks or doves and has the final say when it comes to dividing the votes to avoid a 50-50 tie on whether the vote is current or not. The policy should be amended. The Chairman will often make live follow-up speeches, communicating the current cash position and outlook. The central bank will try to push its monetary policy forward without causing violent fluctuations in interest rates, stocks, or its currency. All central bank members will direct their stance towards the markets before the policy meeting. A few days before the policy meeting and until the new policy is announced, members are prohibited from speaking publicly. This is called a blackout period.