US Dollar (DXY): Investors Await Fed’s Next Move as Money Markets Price in Rate Hike for May

Highlights

1. US labor market shows strength, increases Fed rate hike chances for May
2. Yen recovers losses, euro and sterling edge higher
3. CPI report to provide significant clue on Fed policy and impact dollar index and major

Overview

The US dollar took a breather on Tuesday from its recent upward momentum against other major currencies as the US labor market continued to show strength, reinforcing the possibility of a Federal Reserve rate hike in May.

At 04:28 GMT, June US Dollar Index futures traded at 102.045, down 0.204 or -0.20%, while on Monday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $27.90, up $0.16 or +0.58%.

Despite a two-day rally in the 10-year Treasury yield, the Japanese yen managed to recover some of its losses from the previous day, though it faced additional pressure overnight as the new Bank of Japan governor pledged to maintain ultra-easy stimulus measures for now. The euro rebounded 0.14% to $1.08745, while sterling rose 0.11% to $1.2397 after a slight overnight decline of 0.23%.

Traders Predict 74% Chance of Fed Rate Hike in May After Strong US Job Data

Traders have put the odds of a quarter-point rate hike by the Fed on May 3 at 74%, after the strong US job data released on Good Friday showed that US employers continued to hire at a robust pace in March, resulting in a drop in the jobless rate. Last week, the money markets priced in a hike next month as a coin toss.

Market Awaits CPI Report for Clue on Fed Policy Direction

Investors will be closely watching the upcoming consumer price index (CPI) report, due on Wednesday, as it will provide a significant clue on the direction of Fed policy.

Since several small US banks collapsed in March, the financial markets have been too pessimistic about the US economy. A robust underlying CPI could trigger a change in market pricing for May, potentially delaying pricing for the start of rate cuts and pushing the dollar index higher towards the 100-day moving average at 103.91 this week.

Therefore, the market will be closely monitoring the CPI report, which could impact the direction of the dollar index and other major currencies in the short term.

Daily June US Dollar Technical Analysis

The main trend is down according to the daily swing chart. However, momentum is trending higher. A trade through 102.745 will change the main trend to up. A move through 101.090 will signal a resumption of the downtrend.

The nearest support is a minor retracement zone at 101.785 – 101.621. On the upside, the closest resistance is a long-term Fibonacci level at 102.310, followed by a long-term 50% level at 102.918.

Daily June US Dollar Technical Forecast

Trader reaction to 102.310 is likely to determine the direction of the June US Dollar Index on Tuesday.

Bearish Scenario

A sustained move under 102.310 will indicate the presence of sellers. This could trigger a quick break into 101.785 – 101.621. Buyers could come in on the first test of this area. Look for a possible acceleration to the downside if 101.621 fails.

Bullish Scenario

A sustained move over 102.310 will signal the presence of buyers. Taking out 102.480 will indicate the buying is getting stronger. This could trigger an intraday surge into the resistance cluster at 102.745 – 102.918.