US Dollar (DXY): Higher on Fed Rate Hike Expectations, ECB Uncertainty

US Dollar Highlights

• Slow inflation, but Fed committed to rate hike
• US consumers expect inflation, boosting rate hike chance
• Eurozone uncertainty ahead of expected rate hike

US Dollar Overview

On Friday, the U.S. Dollar strengthened against several major currencies, following the release of March inflation data that showed a slower growth rate. Despite this development, the Federal Reserve is likely to remain committed to raising interest rates at their upcoming monetary policy meeting.

Specifically, the June US Dollar Index futures settled at $101.430, reflecting a $0.178 or 0.18% increase, while the Invesco DB US Dollar Index Bullish Fund ETF (UUP) closed at $27.75, up $0.04 or 0.13%.

PCE Inflation Grows, But Rate Slows

According to Friday’s data, the personal consumption expenditures (PCE) price index rose by 0.1% in March, following a 0.3% increase in February. Over the 12 months leading up to March, the PCE price index grew by 4.2%, compared to February’s growth rate of 5.1%.

However, excluding the volatile food and energy components, the PCE price index increased by 0.3% in March, similar to February’s growth rate. The core PCE price index, which also excludes food and energy, grew by 4.6% year-on-year in March, slightly lower than February’s 4.7%. These price indexes are crucial for the Fed’s 2% inflation target.

Fed Seeks Further Slowdown Despite Data

Despite the slower growth rate, the Fed still requires a more significant slowdown to achieve their goal. This recent data does not change the policymakers’ outlook for next week. The rate futures market has currently priced in a 90% probability of a 25 basis-point hike after the inflation report.

Consumer Sentiment Boosts Rate Hike

In addition, Friday’s report on the final University of Michigan consumer sentiment showed an increase to 63.5 in April. This was up from March’s three-month low of 62. This increase in sentiment, coupled with U.S. consumers’ one-year inflation outlook of 4.6% this month (compared to March’s 3.6%), has further strengthened rate hike expectations, resulting in a boost for the dollar.

Weak Yen, Euro Boost Dollar Index

The dollar index’s two key components, the Japanese yen and euro, experienced weakness. The yen dropped across all markets after the Bank of Japan’s announcement to maintain ultra-low interest rates and unanimously decided to maintain its yield curve control (YCC) policy.

On the other hand, the euro slipped by 0.1% against the dollar, trading at $1.1017. Economic data for the euro zone showed mixed signals for growth and inflation, which created uncertainty about the European Central Bank’s anticipated interest rate hike next week.

Preliminary data revealed that the euro zone’s gross domestic product grew by 0.1% in the first quarter, lower than the anticipated 0.2% according to a Reuters poll.

Although the euro had significantly dropped earlier in the session, investors sold yen against the euro, which spilled over to the euro/dollar cross, and the euro recovered some losses.

Dollar to Benefit from Safe-Haven Demand

Traders expect the balance of probabilities to gradually shift in favor of the dollar. The “goldilocks” period of strong activity data outside of the U.S. seems to be diminishing, and as a result, some traders anticipate the dollar benefiting from safe-haven demand when the global growth outlook begins to deteriorate more significantly in the upcoming months.

Technical Analysis

The main trend changed to up on Friday when buyers took out the previous main top at $101.940. The next targets are a Fibonacci level at $102.310, followed by a main top at $102.480. Taking out the main top will reaffirm the uptrend with a 50% level at $102.918 the next target.

The nearest support is a minor pivot at 101.390, followed by a short-term support zone at $101.230 – 101.039. This is the last support area before the 101.039 main bottom. A trade through this level will change the main trend to down.

For a look at all of today’s economic events, check out our economic calendar.