US Dollar (DXY): Lower as Fed Moves Closer to Ending Rate Tightening Policy

Highlights

• Dollar edges lower as traders anticipate crucial inflation data.
• Declining dollar index aligns with retreat in Treasury yields.
• Fed officials emphasize rate hikes and bolstering capital reserves in banks.

Dollar Edges Lower Ahead of CPI Data

The dollar is edging lower on Tuesday as traders anticipate the release of U.S. inflation data, which could have a significant impact on the Federal Reserve’s rate hike timeline. Investors are closely watching this data to assess whether inflationary pressures continue to ease, providing valuable insights into the future trajectory of interest rates.

Declining Dollar Index and Treasury Yields

The dollar index, a measure of the U.S. currency’s performance against a basket of six others, has dipped 0.1% on the day, reaching its lowest level in two months. This decline is in line with a retreat in U.S. Treasury yields.

The benchmark 10-year note yield dropped by 4 basis points to 3.966%, breaching the 4% mark from the previous day. Although short-term signs indicate a decline in inflationary pressures, concerns about persistent high inflation levels in the medium term remain. Consequently, the Japanese yen surged to one-month highs against the dollar, pushing the U.S. currency 0.7% lower to 140.34, aligning with the drop in Treasury yields.

Fed Officials’ Views on Rate Hikes

Market participants are also digesting comments from Federal Reserve officials. While acknowledging the need for additional rate hikes due to current inflation levels, they suggest that the central bank is approaching the end of its tightening cycle. Federal Reserve Bank of San Francisco President Mary Daly anticipates a couple more rate hikes in the coming months. Similarly, Cleveland Fed President Loretta Mester emphasizes the importance of higher rates to bring inflation back to the targeted 2% level.

Bolstering Capital Reserves in U.S. Banks

Fed Vice Chair for Supervision Michael Barr stresses the necessity of strengthening the capital reserves of large U.S. banks. Barr expresses skepticism about the ability of bank managers and regulators to anticipate unforeseen risks. As a result, he outlines a plan to increase capital requirements for these institutions, highlighting the need for resilience against both expected and unexpected challenges.

Expectations for June’s CPI Report

Economists surveyed by Reuters predict that the consumer price index (CPI) for June will show a 3.1% rise, marking the lowest reading since March 2021 following May’s 4% increase. The core CPI, which excludes volatile food and energy prices, is expected to decline for the third consecutive month to 5% from 5.3%. However, this figure still surpasses the Federal Reserve’s 2% target.

Limited Impact of Employment Report

The recent employment report, revealing a lower-than-expected increase in non-farm payrolls, triggered a sell-off in the U.S. dollar. However, it had minimal impact on interest rate expectations.

Short-Term Outlook:  Eyes on Inflation Data

Market movements, particularly in response to jobs data and inflation figures, should be approached with caution. The focus remains on tomorrow’s inflation data, which will be released after the July meeting. Rate hike expectations for the meeting are largely solidified. As well as, substantial weakness in inflation figures would be required to alter this outlook.

Technical Analysis

US Dollar (DXY) sentiment is currently indicating a bearish tone as it trades at 101.937, slightly above the previous 4-Hour close of 101.747. The price is below both the 200-4H and 50-4H moving averages, reaffirming the bearish trend. With an RSI reading of 35.47, the market sentiment remains bearish, although close to oversold territory.

The main resistance area is between 101.990 and 102.113, where the current price resides. Based on these factors, the index is poised for an acceleration to the downside with 101.027 to 100.788 the next major target.