US Dollar (DXY): Strengthens as Fed Hike Expectations Rise Amid Strong Jobs Data

Highlights

• Dollar strengthens on expectations of Fed rate hike.
• Wage pressures ease, influencing likelihood of rate increase.
• Traders anticipate impact of upcoming inflation and services data.

Overview

The dollar strengthened against major currencies on Monday, buoyed by expectations of a potential rate hike by the U.S. Federal Reserve following robust jobs data last week. After a brief retreat, the dollar index, which tracks the greenback against six peers, regained momentum as market concerns eased over a possible pause in rate hikes and progress in U.S. debt ceiling negotiations.

Fed May Pause Rate Hikes Despite Strong Payrolls

Despite the impressive payrolls figure for May, signaling a strong U.S. economy, analysts suggest that the Federal Reserve may still have room to halt rate increases. Wage pressures have eased, and unemployment has risen from a 53-year low, factors that could influence the Fed’s decision-making process. As a result, the likelihood of a 25 basis point hike at the June 13-14 meeting has declined to 29.1%, down from the previous week’s 2-in-3 odds.

Market Awaits Services, Inflation Data for Dollar Direction

To gain further insights, market participants are eagerly awaiting U.S. services data scheduled for release later today. However, analysts believe that the upcoming core inflation data next week will have a greater impact on market dynamics. Given the lack of other significant factors before the release of the Consumer Price Index (CPI), the dollar’s potential upside might be limited.

Diverging Views on Rate Hikes Signal Potential Pause

Considering the cooling off in wage inflation and the diverging views within the Federal Open Market Committee (FOMC), there is a prevailing case for a pause in rate hikes at the upcoming June 14 meeting. These factors contribute to a shifting landscape that traders should closely monitor.

Dollar Strengthens Versus Euro, Japanese Yen

Meanwhile, the euro experienced a marginal decline of 0.1% against the dollar, reaching $1.06950. Traders are now turning their attention to European Central Bank chief Christine Lagarde’s testimony in the European Parliament later today, which could provide additional insights into the euro’s future trajectory.

In contrast, the dollar advanced 0.2% against the Japanese yen, reaching 140.265. The yen’s depreciation reflects the prevailing strength of the dollar in the market, which traders should take into consideration when analyzing their positions.

Dollar Gains Amid Rate Hike Expectations

In summary, the dollar’s recent gains against major currencies stem from expectations of a potential rate hike by the Federal Reserve. While robust jobs data supports the case for tightening, factors such as easing wage pressures and rising unemployment may still prompt the Fed to pause rate increases. Traders will closely monitor upcoming economic data and the diverging views within the FOMC for further guidance. Additionally, developments in the eurozone, including Christine Lagarde’s address, will influence the euro’s performance. The dollar’s relative strength against the Japanese yen highlights its overall market resilience.

Technical Analysis

The main trend is up with the market in a position to challenge 104.406 (R1). Overtaking this level could extend the rally into 104.615 (R2). This is a potential trigger point for an acceleration to the upside with 105.490 (R4) the next major target.

The nearest support is 103.631 (S1). A break under this level will be a sign of weakness. But the acceleration to the downside is likely to start when 103.315 (S2) fails. This move could trigger a steep break into 102.405 (S3).

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