US Dollar (DXY): Rebounding as Chinese Data Reveals Slowing Inflation

US Dollar (DXY) Highlights

• Chinese yuan hits lowest level since March 10 against U.S. dollar.
• U.S. Treasury yields decline after April CPI report release.
• Wholesale inflation report to impact future Fed interest rate decisions.

US Dollar (DXY) Overview

The U.S. Dollar (DXY) is slightly gaining ground against a group of major currencies on Thursday after reversing an earlier decline. The dollar started the day on a weaker note, losing ground against the yen due to lower U.S. Treasury yields. The market sentiment was positive as U.S. inflation showed signs of slowing down, indicating that the Federal Reserve may not raise interest rates further.

However, the dollar managed to recover and regain its losses against the Euro when Chinese data was released, revealing minimal growth in consumer inflation last month. This news came after a surprise drop in imports earlier in the week, which had already raised concerns.

Currently, June U.S. Dollar Index futures are trading at $101.670, up $0.401 or 0.40% as of 07:55 GMT. Yesterday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) closed at $27.73, down $0.06 or 0.23%.

Weak Chinese Inflation Data Influences

In recent developments, the Chinese yuan weakened against the U.S. dollar, reaching its lowest level since March 10. Meanwhile, the British pound saw a slight decline from its one-year high, as the Bank of England is expected to raise interest rates for the 12th consecutive time. The U.S. dollar also experienced a small drop against the Japanese yen, while the euro remained relatively stable.

April CPI Meets Expectations

On another front, U.S. Treasury yields declined following the release of the latest Consumer Price Index (CPI) report, which showed a slight increase in inflation for April. Although the increase aligned with economists’ expectations, the annual inflation rate fell just below the estimated level.

Wholesale Inflation to Influence Fed’s Policy

These CPI figures will be followed by the release of the April wholesale inflation report on Thursday, which will impact future monetary policy decisions by the Federal Reserve, particularly regarding interest rates.

While the Fed recently announced a rate hike, signaling a potential pause in further increases, New York Fed President John Williams expressed the possibility of additional rate hikes if inflation pressures persist. These discussions take place amid concerns about the potential negative effects of elevated interest rates on the economy.

Short-Term Forecast

Based on the recent developments, the forecast for the U.S. dollar suggests a slightly positive outlook against major currencies. The dollar initially faced some weakness due to lower U.S. Treasury yields, but it managed to reverse its decline.

Positive market sentiment arose as U.S. inflation showed signs of slowing down, indicating a potential halt in further interest rate hikes by the Federal Reserve.

However, future movements will depend on upcoming data, including the April wholesale inflation report, as well as the persistence of inflationary pressures, which may influence the likelihood of additional rate hikes.

Technical Analysis

The main trend is down. It turned down last week when sellers took out $100.740. A trade through 102.185 (R3) will change the main trend to up. Trader reaction to 101.353 will set the tone on Thursday.

A sustained trade over (R1) at 101.353 will indicate the buying pressure is getting stronger with $101.797 (R2) and $102.185 (R3) the next targets.

A sustained move under (R1) at 101.353 will signal the presence of sellers. If this creates enough downside momentum, we could see an acceleration into the support cluster at 100.520 – 100.345.