US Dollar (DXY): Choppy Trade Due to Uncertainty about Fed’s Policy Outlook

Highlights

• U.S. dollar recovers as Euro weakens, influenced by disappointing German factory earnings.
• Unexpected soft U.S. services data raises uncertainty about Federal Reserve’s policy outlook.
• Fed expected to pause at upcoming policy meeting, aligning with market sentiment.

Overview

The U.S. dollar is staging a recovery against a basket of currencies, bolstered by a weaker Euro. Disappointing factory earnings from Germany and below-expectation Euro Zone retail sales have contributed to the Euro’s retreat from earlier highs. While the U.S. dollar remains steady below recent highs, unexpected soft U.S. services data has raised uncertainty regarding the Federal Reserve’s policy outlook.

Dollar Volatility Continues

The U.S. dollar, measured by the dollar index against major peers, stands at 104.04 after experiencing some volatility. It reached a 2 1/2-month peak of 104.70 at the end of May but faced setbacks following suggestions from Fed officials about a potential rate hike pause in June. Notably, the U.S. dollar slipped 0.2% against the Canadian dollar and declined 0.1% against the yen, while sterling fell 0.3% against the greenback. The Euro, on the other hand, has declined by 0.18%.

Uncertainty Surrounds Fed

Investors worldwide have closely monitored U.S. rates, as recent data releases and Fed rhetoric have induced volatility in the U.S. currency. The market sentiment regarding future rate hikes has become uncertain due to conflicting indicators. Strong employment numbers on Friday increased bets for a July rate hike, while weak services sector data on Monday clouded the rate outlook once again. As the Federal Open Market Committee (FOMC) prepares to set policy on June 14, markets now indicate a 75% chance of the Fed maintaining the status quo, a significant rise from the 36% chance observed just a week prior.

Anticipation of Fed Pause

Both analysts and the market anticipate the Fed to pause next week, aligning with the long-held belief. With no major U.S. data expected for the remainder of the week and Fed officials in a “blackout” period, the euro-dollar pairing is expected to experience a period of relative calm before the upcoming Fed and European Central Bank policy meetings. Traders foresee a range-bound trading pattern around 1.07 for the EUR/USD in the near term.

Short-Term Outlook:  Shifting to Bearish

Based on the provided data, the short-term forecast for the US Dollar Index leans towards a bearish outlook. Market sentiment suggests that the Federal Reserve is likely to pause at its upcoming policy meeting, aligning with the long-held belief. However, it’s important to closely monitor the upcoming central bank meetings and any shifts in market dynamics that could potentially alter the currency’s trajectory.

Technical Analysis

The main trend is up with the market in a position to challenge 104.406 (R1). Overtaking this level could extend the rally into 104.615 (R2). This is a potential trigger point for an acceleration to the upside with 105.490 (R4) the next major target.

The nearest support is 103.631 (S1). A break under this level will be a sign of weakness. But the acceleration to the downside is likely to start when 103.315 (S2) fails. This move could trigger a steep break into 102.405 (S3).

A move through 104.406 will be an early sign of strength, but a move through 104.615 will reaffirm the uptrend. A trade through 103.631 will be the first sign of weakness, but a trade through 103.315 will change the momentum to down.

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