US Dollar (DXY): Firm as Rising Inflation Boosts Chances of Fed Rate Hike

US Dollar Index (DXY) Highlights

1. Q1 US GDP growth falls short of economists’ expectations at 1.1%
2. Quarterly core PCE inflation figures higher than expected at 4.9%
3. Tight labor market, unemployment benefits claims drop

US Dollar Index (DXY) Overview

Despite weaker-than-expected U.S. economic growth in the first quarter, the US Dollar is making gains against major currencies on Thursday.

According to the preliminary estimate of the first-quarter gross domestic product, there was an annualized rate of 1.1%, compared to 2.6% in the fourth quarter, falling short of economists’ expectations of a 2.0% rise in GDP, as per a Reuters survey.

At 16:30, June U.S. Dollar Index futures are trading 101.250, up 0.045 or +0.04%. The Invesco DB US Dollar Index Bullish Fund ETF (UUP) is at $27.71, up $0.01 or +0.02%.

However, investors focused on the quarterly inflation number within the GDP report, which indicated a 4.9% increase in core personal consumption expenditure prices during the first three months of the year, higher than the expected 4.7% and up from the previous quarter’s figure.

This news reinforces the likelihood of an interest rate hike from the Federal Reserve at next week’s policy meeting on May 2-3.

Traders Shifts Focus to Inflation

Initially, the knee-jerk reaction was to sell the dollar due to lower yields following weaker-than-expected GDP, but the market quickly shifted focus to the higher quarterly core PCE number.

Despite the weak GDP, especially with the elevated core PCE figure, the Fed is expected to raise rates by 25 basis points at next week’s policy meeting.

The market has already priced in an 88% probability of this rate hike for May.

US Jobless Claims Drop

Also on Thursday, a separate report from the Labor Department revealed that initial claims for state unemployment benefits declined by 16,000 to a seasonally adjusted 230,000 for the week ending April 22, surpassing economists’ expectations of 248,000 claims for the latest week. The report implies a tight labor market and further supports the anticipation of a rate increase next week.

Technical Analysis

From a daily technical viewpoint, June US Dollar Index futures are trading inside a pivot zone at 101.180 – 101.450. The short-term technicals are neutral although the longer-term trend is down.

A sustained move over 101.695 will indicate the presence of buyers. Overcoming 101.940 will indicate the buying is getting stronger with 102.310 the next target.

A sustained move under 101.000 will signal the presenc of sellers. This could trigger a quick break into 100.740. If this fails then look for the selling to possibly extend into the support cluster at 100.420 – 100.345.

For a look at all of today’s economic events, check out our economic calendar.