- The White House’s conflicting statements on additional tariffs on Chinese imports are creating volatile market conditions.
- Investors expect no immediate interest rate cuts in the first half of the year, in line with the strong performance of the US economy despite limited official statements from the Federal Reserve.
- Analysts still attribute the fundamental strength of the US dollar to the United States’ enduring economic advantage over its global counterparts.
The US dollar is trading flat on Wednesday after two days of losses as the correction aims to continue. Markets are trying to gauge 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 limit at 107.00. On the Fed side, the bank is suffering from a media blackout and with no high-level economic reports, markets are left with no direction to bet on the data-driven Fed’s next steps.
Daily summary of market drivers: Mixed signals add to tariff confusion as Fed opacity continues
- President Trump unveiled potential 10% tariffs on products coming from China, linking them to broader concerns about fentanyl flows and reiterating that other countries could face tariffs as well. This follows earlier rumors that the US administration may postpone immediate measures, highlighting the contradictory rhetoric.
- The strong backdrop for the US dollar remains primarily driven by the outstanding growth of the US economy despite the headlines on trade policy. Analysts point out that once the tariff fog clears, the US dollar could reassert its dominance.
- Fed Media Blackout: Prior to Chairman Powell’s post-decision press conference on January 29, officials remained silent. Markets widely expect one rate cut in July, consistent with strong US data.
- Uncertainty over tariffs increases volatility, however currency strategists advise traders to look beyond the daily political noise as long-term US economic momentum remains supportive of the dollar.
DXY Technical Outlook: Continued selling pressure is affecting key levels
After the bears beat the 20-day simple moving average (SMA), the outlook has turned somewhat bearish as the DXY is now vulnerable to further losses. If the DXY wants to revive its upward trajectory, it must overcome the 109.30 level convincingly.
But failure to defend near-term support levels surrounding 107.50 to 108.00 could lead to further downside. The fundamental outlook for the US dollar remains positive, supported by economic strength and dovish Fed policy outlook.
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 will make it harder or easier for people to earn their savings or for companies to get 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.