- April’s US Producer Price Index prints higher monthly reading than expected.
- Fed Chair Jerome Powell signals strong US economic outlook, which may delay interest rate cuts.
- Markets await CPI data on Wednesday to continue placing their bets on the easing cycle of the Fed.
The US Dollar Index (DXY) is currently trading at around 105.35, displaying minimal losses. The US Producer Price Index (PPI) showed no surprise on the annual print, but monthly prices rose more than expected. Jerome Powell attached to the script given in the last Federal Reserve (Fed) decision that interest rates might have to be kept higher for longer but that cuts will eventually come and inflation will get back to target.
The US economy is displaying robust growth and persistent inflation, which is making the Fed remain cautious about cutting rates. On Wednesday, April’s Consumer Price Index (CPI) data will likely impact the expectations on the easing cycle, which is seen starting in September.
Daily digest market movers: DXY is mildly down as markets digest PPI data ahead of CPI
- US Bureau of Labor Statistics revealed that the Producer Price Index (PPI) increased by 2.2% on a yearly basis in April. Annual core PPI and monthly core PPI both posted a rise of 2.4% and 0.5%, respectively, in line with March figures.
- Both PPI and core PPI reported a 0.5% rise in April MoM.
- The odds of a cut in June and July remain low as the best-case scenario for the markets at the moment is that the Fed will start cutting in September. A cut in November is fully priced in.
DXY technical analysis: DXY posts correctives but maintains bullish bias
On the daily chart, the Relative Strength Index (RSI) traces a negative slope in negative territory, which indicates that selling momentum is still present. In addition, the Moving Average Convergence Divergence (MACD) shows rising red bars, which demonstrates increasing bearish momentum in the short-term outlook.
That being said, the DXY’s position relative to its Simple Moving Averages (SMAs) paints a different picture. Currently, the index is below the 20-day SMA, showcasing the recent bearish control, but the fact that it is above the 100 and 200-day SMAs points out that the underpinning support from the bulls is not all lost.
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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