US Dollar (DXY): Weakens as US Inflation Softens, British Pound Jumps

Highlights

• US dollar index declines as US inflation eases.
• British pound strengthens on higher UK bond yields and US dollar weakness.
• Euro weakens against both pound and US dollar.

Overview

US Dollar Index Weakens as US Inflation Eases

The US dollar index, tracking the currency against six major peers, experienced a slight decline of 0.19% to 103.13, reversing earlier gains. This shift occurred as a key indicator of US inflation softened, affecting market sentiment. US personal consumption expenditures (PCE) inflation, the Federal Reserve’s preferred gauge of price pressures, slowed to 3.8% year-on-year in May, compared to April’s 4.3%. Additionally, core PCE inflation, which excludes volatile food and energy prices, cooled to 4.6% in May, surprising economists who expected it to remain at 4.7%. As a result, the US dollar weakened slightly.

British Pound Gains on Higher UK Bond Yields

In response to the US inflation data, the British pound saw an upward movement from its initial level of $1.266. The pound rose on Friday, supported by higher UK bond yields and the decline in the US dollar, signaling a deceleration in US inflation. Sterling recorded a 0.55% increase, reaching $1.268 and was on track to achieve a monthly gain of 1.9%.

During June, UK bond yields experienced a significant rise, highlighting persistent inflationary pressures in Britain. As a response, the Bank of England unexpectedly raised interest rates by 50 basis points the previous week. The surge in yields often strengthens a country’s currency. This occurs because it makes fixed income investments more attractive, ultimately contributing to the appreciation of the pound.

Euro Weaker against Dollar, Sterling

Contrary to the pound’s gains, the euro experienced a decline of 0.34% against the pound, reaching 85.85 pence. This comes after a 2% slide against the pound in May, with the euro now set for a 0.1% monthly fall. German bonds remained relatively stable amidst these developments.

Short-Term Forecast: Bearish for US Dollar Index

The recent easing of US inflation leads to a bearish outlook for the US dollar index in the short term. US personal consumption expenditures (PCE) inflation and core PCE inflation cool, causing the US dollar index to decline by 0.19% to 103.13. Market sentiment has been affected by these developments, signaling a weakening trend for the US dollar. Traders and investors will closely monitor economic indicators. They will also keep a close eye on the Federal Reserve’s actions in response to inflation trends for further insights into the currency’s performance.

Technical Analysis

The US Dollar (DXY) market currently exhibits a consolidation phase as the price hovers between the main support area of 101.930 to 102.113 and the main resistance area of 103.280 to 103.424.

The relationship between the current 4-hour price and the previous 4-hour close suggests a bearish sentiment, with the price lower than the previous close. However, the price is trading above the 50-4H moving average, indicating a potential bullish sentiment in the short term, but below the 200-4H moving average.

The 14-4H RSI reading of 46.05 reflects a relatively neutral market sentiment. Overall, the US Dollar market is in a consolidation phase, and traders should closely monitor price movements for potential breakouts.