- The US Dollar in positive for this week, sticking to the range where it is in against most major peers.
- China has denied comments as trade talks are underway between China and the US.
- The US Dollar Index remains capped below the 100.00 round level.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, trades on the front foot, up around 0.40% on Friday at the time of writing. Traders are divided, though, after the US and China left contradictory comments on whether trade deal negotiations are taking place. United States (US) President Donald Trump said on Thursday that the US is talking to China, propping up the equity markets higher, and favoring the Greenback’s return.
Additionally, citing sources familiar with the matter, Bloomberg reported on Friday that China is mulling suspending its 125% tariff on some US imports, including medical equipment, ethane and plane leasing. However, China’s Foreign Ministry clarified that “China and the US are not having any consultations or negotiations on tariffs.” When asked about tariff exemptions on some US goods, the Foreign Ministry spokesperson said, “I’m not familiar with specifics, I refer you to competent authorities.”
On the economic calendar front, there is a very light calendar ahead. The Federal Reserve (Fed) has entered its blackout period ahead of its upcoming Federal Open Market Committee (FOMC) meeting on May 7. Meanwhile, this Friday, traders can look at the final April reading for the University of Michigan Consumer Sentiment numbers and inflation expectations.
Daily digest market movers: China denies
- Ahead of the US trading session, US President Trump confirmed the US and China are in talks, even confirming to Reuters that Chinese President Xi Jinping has been on the phone with the US president. Trump did not disclose with whom trade talks are taking place. The rumor meanwhile got confirmed by United States Secretary of the Treasury Scott Bessent. Details on the content or when a deal is expected remain sketchy.
- China from their end are still denying talks and demand these unfounded rumors end. In addition, China asks first to see all imposed tariffs being lifted before talks could be considered.
- The University of Michigan has released its final reading for April.
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- The Consumer Sentiment Index came in at 52.2, from 50.8 in the preliminary reading.
- The 5-year Consumer Inflation Expectations remains at 4.4%.
- Equities are starting to doubt on the Trump comment as there is no reason why China would deny the news this firmly. European equities are marginally higher, while US futures are turning negative.
- The CME FedWatch tool shows the chance of an interest rate cut by the Federal Reserve in May’s meeting stands at 6.1% against a 95.3% probability of no change. The June meeting still has around a 61.4% chance of a rate cut.
- The US 10-year yields trade around 4.28%, looking for direction as markets face some knee-jerk reactions on the Trump comments.
US Dollar Index Technical Analysis: Month end ahead
The US Dollar Index (DXY) might look bullish and set to jump higher once headlines emerge of a possible trade deal between China and the US, as rumors are building up now towards that possibility. However, a big downside risk comes with a potential peace deal between Russia and Ukraine, which would boost the Euro (EUR) and weigh on the DXY. So, there are a lot of moving parts that could outweigh the upside or downside for the US Dollar Index.
On the upside, the DXY’s first resistance comes in at 99.58, where a false break occurred Wednesday and Thursday. Should the US Dollar extend recovery, look for 100.22, which supported the DXY in September 2024, with a break back above the 100.00 round level as a bullish signal of their return. A firm recovery would be a return to 101.90.
On the other hand, the 97.73 support could quickly be tested on any substantial bearish headline. Further below, a relatively thin technical support comes in at 96.94, before looking at the lower levels of this new price range. These would be at 95.25 and 94.56, meaning fresh lows not seen since 2022.
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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