US Dollar (DXY) Index News: Weaker Economic Growth, Treasury Yields Weigh

U.S. Dollar Index Declines as Economic Data Disappoints

The U.S. Dollar Index (DXY) traded lower on Thursday, reversing earlier gains. The index struggled to maintain momentum after failing to surpass the 50-day moving average, impacted by weaker-than-expected economic data, retreating Treasury yields, and position squaring ahead of Friday’s PCE inflation report.

At 19:39 GMT, the U.S. Dollar Index is trading 104.749, down 0.368 or -0.35%.

Economic Growth Revised Downward

Revised data revealed that the U.S. economy grew at a slower pace than previously estimated in Q1 2024. The Commerce Department reported an annualized GDP growth rate of 1.3%, down from the initial estimate of 1.6%, primarily due to downward revisions in consumer spending. This follows recent soft retail sales and equipment spending figures, contributing to reduced expectations for Federal Reserve interest rate cuts.

Helen Given, an FX trader at Monex USA, noted, “All of these figures coming in below expectations … is taking a bit of heat off of the Fed.”

Treasury Yields and Dollar Movements

A two-day, 15-basis point surge in long-term Treasury yields above 4.6% had temporarily boosted the dollar on Wednesday. The DXY reached 105.18 overnight, its highest level since mid-May, but fell 0.37% to 104.71 by late Thursday.

Yen and Euro Movements

The dollar dropped 0.51% against the Japanese yen, trading at 156.79 after hitting a one-month high of 157.72 on Wednesday. Charu Chanana, head of FX strategy at Saxo Bank, pointed out potential Japanese intervention concerns as the yen neared the 158 level, a critical point for possible action by Japanese authorities.

The euro rose 0.33% to $1.0836, rebounding from a two-week low of $1.0789 reached overnight. Sterling also recovered, up 0.2% to $1.2733 after falling 0.5% on Wednesday.

Market Focus on Inflation Data

Expectations for Fed rate cuts have been scaled back amid persistent inflation pressures. Traders are now closely watching Friday’s release of the Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation gauge, for further clues on monetary policy. Additionally, eurozone price data due Friday will provide insights following stronger-than-expected German inflation data earlier this week.

Market Forecast

Given the revised economic growth figures and the upcoming inflation reports, two scenarios could unfold for the U.S. Dollar Index:

1. Bearish Scenario: If the PCE data comes in line with or below expectations, the dollar is likely to remain under pressure. This would reinforce the view that the Fed might hold off on rate hikes, leading to a bearish outlook for the DXY.

Bullish Scenario: Conversely, if the PCE data is hotter than expected, indicating persistent inflation, the dollar could see a resurgence. This would increase the likelihood of the Fed maintaining a tighter monetary policy stance, driving the dollar higher in the short term.

Technical Analysis

The DXY is lower after failing to overcome key intermediate resistance earlier in the session. Stopping the market from continuing its two-day rally was the 50-day moving average at 105.079.

Downside momentum suggests that the next potential target is the 200-day moving average at 104.420. This indicator is controlling the longer-term direction of the market.

Surrounded by the 50- and 200-day moving averages suggests investor indecision and impending volatility. Look for Friday’s PCE inflation report that drive a volatile move through resistance or support.

Unfortunately, I can’t be more accurate than that. We’re in a news driven market. The direction of Treasury yields will have a lot to say about the size and duration of the next volatile move.