US Dollar (DXY): Flat as Investors Remain Cautious Ahead of Fed Rate Hike

Highlights

• Fed expected to raise rates by 25 basis points in May
• Hawkish Fed official says inflation rates remain problmatic
• US economic activity stagnant with slight decrease in employment growth

Overview

The US Dollar is trading flat against a basket of currencies on Thursday as investors remained cautious ahead of an expected 25 basis point hike by the U.S. Federal Reserve next month.

At 05:51 GMT, June US Dollar Index futures are trading 101.696, up 0.027 or +0.03%. On Wednesday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $27.79, up $0.07 or +0.25%.

Fed Expected to Raise Rates in May, Maintain Level for Rest of Year

According to a Reuters poll of economists, the Federal Reserve is expected to raise interest rates by 25 basis points in May and then maintain the same level for the remainder of the year, while CME FedWatch tool indicates an 83% likelihood of the Fed raising rates by 25 basis points; furthermore, the hawkish tone from Fed speakers has continued, with Federal Reserve Bank of New York President John Williams stating that inflation rates remain problematic and the central bank will take measures to reduce them.

Volatility Declines, US Dollar Loses Safe-Haven Appeal Amid Lower Yields

Volatility has decreased as concerns about a banking crisis have eased. The CBOE Volatility Index dropped to its lowest level since November 2021. This led to a decline in the US dollar’s safe-haven appeal. Meanwhile, yields on benchmark 10-year bonds eased to 3.597% in Asian hours. This followed a four-week high of 3.639% on Wednesday. Traders are anticipating meetings from central banks in the coming weeks as they try to manage both inflation and financial stability.

US Economic Activity Stagnant with Slight Employment Decline: Fed Report

On Wednesday, the Federal Reserve released a report on the state of the US economy. The report revealed that economic activity has remained stagnant in recent weeks. There was a slight decrease in employment growth and a deceleration in price increases. The report provided an overview of the current state of businesses, banks, and workers. This is following the mid-March collapse of two major regional banks, which shook confidence in the American financial sector.

US Dollar Index Components: Euro Rises, Yen Weakens, Pound Declines

Regarding the components of the US Dollar Index, the Euro has risen by 0.04% to $1.0958, the Japanese Yen has weakened by 0.08% to 134.83 per dollar, and the British Pound is currently trading at $1.2432, representing a 0.05% decline on the day.

Technical Analysis

From a daily technical viewpoint, June US Dollar Index futures are trading inside a pivot zone at 101.450 – 101.695. The technicals appear to be in favor of a downside move. Overtaking 101.695 could extend the rally into 102.310.  Meanwhile, a break back under 101.450 will be a sign of weakness. This could create the downside momentum needed to challenge the support cluster at 100.420 – 100.345.

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