Will DXY Rebound? US Inflation Expectations and Fed Meeting in Focus

Dollar Index Slips as Inflation Concerns Weigh, Euro Strengthens on German Fiscal Deal

The U.S. Dollar Index (DXY) edged lower on Friday, closing at 103.734 (-0.1%), marking its second consecutive weekly decline. Weighed down by stronger euro demand and concerns over rising U.S. inflation expectations, the greenback struggled to hold gains despite higher Treasury yields and fading government shutdown risks.

Dollar Pressured by Inflation Concerns and Euro Strength

The University of Michigan survey revealed that U.S. consumer sentiment fell sharply in March to 57.9, well below expectations of 63.2. More critically, one-year inflation expectations surged from 4.3% to 4.9%, reinforcing concerns that price pressures remain persistent. NatAlliance’s Andrew Brenner called the report “stagflationary,” suggesting that it could influence the Federal Reserve’s rate outlook when policymakers meet next week.

Treasury yields reacted by moving higher, with the 10-year yield rising 4 basis points to 4.318% and the 2-year yield climbing 7 basis points to 4.023%. Despite this, the dollar remained under pressure against major currencies, particularly the euro.

Euro Rallies on German Fiscal Deal

The euro rose 0.3% to $1.082 after Germany reached a fiscal agreement that could bolster growth in Europe’s largest economy. Incoming Chancellor Friedrich Merz secured Green Party support for a €500 billion ($544.3 billion) infrastructure fund, alongside borrowing reforms. This policy shift could provide economic stimulus and support the European Central Bank’s hawkish stance.

Nomura’s Dominic Bunning sees further euro upside, particularly against the Swiss franc and British pound, as markets expect the ECB to keep rates steady in April. The euro posted a second straight week of gains, also rising 0.3% to 84.08 pence against the pound and 0.5% to 0.96255 against the Swiss franc.

Dollar Holds Gains Against Yen, Swiss Franc

The dollar found support against the yen and Swiss franc as government shutdown risks eased. Senate Majority Leader Chuck Schumer indicated bipartisan support for a stopgap funding bill, reducing near-term fiscal uncertainty. The dollar rose 0.4% to 0.885 against the Swiss franc and gained 0.6% against the yen to 148.63.

However, the British pound remained resilient despite weak U.K. GDP data. Sterling dipped 0.1% to $1.2928 after a surprise 0.1% contraction in January but held near its four-month high of $1.2990.

Market Outlook: Key Resistance Levels in Focus

The Dollar Index tested key technical levels, finding support at 103.373 but struggling to break above resistance at 103.984. A move beyond this level could target the 200-day moving average at 104.976 and a 50% retracement level at 105.167.

Short-term conditions suggest the market may be oversold, but the broader trend remains bearish as long as DXY stays below the 200-day moving average. Next week’s Fed meeting and inflation data will be key in determining whether the dollar can regain strength, or continue the downtrend.

More Information in our Economic Calendar.