The US Dollar Index (DXY), which tracks the strength of the USD against a range of other currencies, saw a decline after softer-than-expected Personal Consumption Expenditures (PCE) numbers were published during the European market hours. Investors are also reevaluating political tensions in the US, which have dampened market sentiment.
Daily Digest Market Movers: The US Dollar’s Reaction to PCE Data, Risks of a Government Shutdown, and the Fed’s Position
The possibility of a US government shutdown has increased after House Republicans did not succeed in passing a funding bill. Although a brief shutdown might have a minimal effect on markets, all eyes remain on the negotiations. Long-term Treasury yields are on the rise, with the 10-year yield nearing 4.60% and the 30-year yield coming close to 4.77%, causing the yield curve to steepen. November’s PCE data was softer than anticipated, revealing a monthly headline inflation rate of 0.1% and an annual rate of 2.4%, falling short of the projected 2.5%. Core PCE figures also missed the mark. Despite the slight drop in inflation, it’s unlikely to significantly change the Federal Reserve’s recent hawkish position. The Fed’s signals suggest continued support for the dollar’s relative strength, even with fewer expected cuts in 2025. Meanwhile, a solid Q3 GDP growth rate of 3.1% SAAR and strong consumer spending underline the resilience of the US economy. The Atlanta Fed’s GDPNow model predicts Q4 growth at 3.2% SAAR, while the New York Fed’s Nowcast projects it at 1.9% SAAR, keeping an optimistic growth story alive.
DXY Technical Outlook: Indicators Ease as the Index Dips Below 108.00
Following an upward trend seen on Wednesday, indicators are now showing some easing with the DXY dropping below 108.00 on Friday, currently hovering around 107.60. This pullback suggests that the recent surge might be pausing. However, if DXY remains above its 20-day Simple Moving Average, the overall bullish trend could continue, making room for further gains once the profit-taking phase concludes and underlying factors come back into the forefront.
Central Banks FAQs
Central banks play a crucial role in maintaining price stability within an economy or region. Economies are consistently challenged by inflation or deflation as the prices of goods and services fluctuate. Sustained price increases signal inflation, whereas consistent price drops indicate deflation. It’s up to the central bank to adjust the policy rate to align demand. For major central banks like the US Federal Reserve (Fed), the European Central Bank (ECB), or the Bank of England (BoE), the goal is to keep inflation near 2%.
The primary tool available to a central bank for adjusting inflation levels is the benchmark policy rate, often referred to as the interest rate. During predetermined intervals, the central bank announces its policy rate along with an explanation for either maintaining or altering it (through either a cut or hike). Local banks then adjust their savings and lending rates, influencing how easily people can earn from savings or businesses can secure loans for investment. A significant hike in interest rates is known as monetary tightening, while cutting the benchmark rate is termed monetary easing.
Typically, central banks operate independently of political influence. Board members undergo comprehensive evaluations before securing their positions on the decision-making body. On the board, some members might lean towards a loose monetary policy, favoring low rates and affordable lending to boost economic growth, even if inflation slightly overshoots 2%. These members are often called ‘doves.’ Conversely, those who prefer higher rates to reward savings and keep inflation firmly under 2% are called ‘hawks.’ A central bank’s leader, usually a chairman or president, orchestrates meetings and aims to achieve consensus between hawks and doves. In case of a voting deadlock, the leader’s vote could be the tiebreaker. These leaders also deliver speeches, often observed live, discussing the current monetary policy and plans. Central banks strive to implement policies without causing major market disturbances in interest rates, equities, or currency values. Members typically communicate their views ahead of policy meetings to set market expectations. Moreover, a ‘blackout period’ is observed wherein members refrain from public comments until the policy announcement is made.
