US Dollar (DXY): Boosted by Strong US Economic Data as Treasury Yields Rise

Highlights

• U.S. dollar strengthens due to robust economic data and higher Treasury yields.
• Euro and Japanese Yen experience negative impact as investors favor the dollar.
• Divergent policy plans and potential intervention add uncertainty to currency markets.

Overview

The U.S. dollar gained ground against major currencies on Thursday, fueled by robust U.S. economic data that pushed Treasury yields higher. The positive news had a negative impact on the Euro and Japanese Yen, as investors sought the greenback as a more attractive asset.

Strong GDP Drives Treasury Yields Higher

U.S. Treasury yields climbed following an announcement that gross domestic product (GDP) in the first quarter exceeded expectations. Revised data revealed a 2% annualized growth rate, surpassing the previous estimate of 1.3% and the forecast of 1.4% by Dow Jones. Additionally, weekly jobless claims dropped to 239,000, the lowest level since May and below economists’ expectations of 264,000.

These positive developments in economic growth and the labor market triggered a bearish sentiment toward Treasuries, leading to an increase in demand for the U.S. dollar.

Policy Divergence Pressures Yen

The currency touched a seven-month high against the Japanese Yen as the Federal Reserve Chair, Jerome Powell, indicated the likelihood of two rate hikes this year and didn’t rule out a potential increase in July. In contrast, the Bank of Japan Governor, Kazuo Ueda, emphasized the need for sustainable 2% inflation and wage growth before considering an exit from ultra-easy stimulus.

The Japanese government officials have expressed concerns about the rapid surge in the dollar’s value against the Yen. This is prompting verbal warnings and raising the possibility of intervention in the currency market. Last year, the ministry of finance and BOJ intervened when the dollar exceeded 145 yen. Currently, the dollar was up 0.25% at 144.855.

Mixed Inflation Data Weighs on Euro

Meanwhile, the Euro faced mixed inflation data from German states and Spain. Although consumer prices in Germany’s most populous state, North Rhine Westphalia, rose 6.2% on an annual basis in June, up from 5.7% in May, a similar pattern was observed in other states. Spain experienced a decline in 12-month inflation to 1.9%, the lowest since March 2021, but still above economists’ expectations of 1.7%.

Looking ahead, investors are closely monitoring the upcoming euro area-wide inflation figure, which could further influence the Euro’s performance.

Short-Term Forecast:  Higher Yields Supportive

In conclusion, the U.S. dollar’s rise against major currencies was driven by strong U.S. economic data and higher Treasury yields. While the Euro faced mixed inflation data, the Japanese Yen was affected by divergent policy plans between the Federal Reserve and the Bank of Japan. The potential for intervention in the currency market adds another layer of uncertainty to the dollar-yen exchange rate. Traders will keep a close eye on future economic indicators and central bank actions as they navigate the currency markets.

Technical Analysis

The analysis of the US Dollar (DXY) based on technical indicators suggests predominantly bullish sentiment. The current price of 103.371 is higher than the previous close of 102.865, indicating an upward movement. Additionally, the price is above both the 200-4H moving average of 103.312 and the 50-4H moving average of 102.633. This supports the bullish outlook. The 14-4H RSI reading of 64.98 indicates a moderately bullish sentiment. The RSI is currently holding comfortably above the neutral level of 50.

The current price action supports a bullish bias.