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US Dollar (DXY) Index News: Steady as Traders Recalibrate Rate Cuts

By:
James Hyerczyk
Updated: May 21, 2024, 14:26 GMT+00:00

Key Points:

  • Recalibrated expectations for rate cuts support Dollar strength, reflecting cautious Fed stance.
  • Waller indicates that while inflation eases, rate cuts remain uncertain, boosting the Dollar.
  • U.S. Treasury yields dip as market uncertainty about future inflation and rates increases.
US Dollar (DXY) Index News: Steady as Traders Recalibrate Rate Cuts

Fed Governor Signals Caution on Rate Cuts

The U.S. Dollar is trading steady against a basket of major currencies on Tuesday following somewhat hawkish comments from Federal Reserve Governor Christopher Waller. Speaking at the Peterson Institute for International Economics, Waller indicated that while recent data shows inflation easing, he does not foresee further interest rate increases but remains hesitant to support cuts in the near future.

At 14:49 GMT, the U.S. Dollar Index is trading 104.619, down 0.005 or -0.00%.

Inflation Data and Market Response

Waller pointed to recent flattening retail sales and cooling manufacturing and services sectors as signs that higher rates are moderating demand. Although payroll gains have been solid, internal metrics suggest the labor market is loosening, potentially aligning with the Fed’s 2% inflation target. April’s Consumer Price Index (CPI) showed a 3.4% year-over-year increase, slightly below expectations, but Waller remains cautious, needing several months of good inflation data before supporting any policy easing.

Market Recalibration and Expectations

Earlier in the year, futures market traders anticipated at least six rate cuts in 2023, starting in March. However, persistent inflation data has adjusted this outlook, with the first cut now expected in September at the earliest, and potentially only two quarter-point reductions by year-end. This recalibration reflects the Fed’s cautious stance and the recent hawkish tone from officials, including Atlanta Fed President Raphael Bostic, who emphasized the likelihood of a higher steady rate than in the past decade.

Investor Sentiment and Treasury Yields

With little U.S. economic data scheduled this week, investor focus has shifted to Federal Reserve speakers and their views on monetary policy. Treasury yields edged lower, with the 10-year yield dropping by around 3 basis points to 4.408% and the 2-year yield at 4.826%, reflecting market uncertainty about the path of inflation and interest rates.

Market Forecast

In the short term, the U.S. Dollar is likely to maintain its strength due to the hawkish stance from Fed officials and the recalibrated market expectations for rate cuts. Investors should monitor upcoming data, particularly the Personal Consumption Expenditures (PCE) price index report due on May 31, for further clues on inflation trends. If the Fed continues to signal caution, the Dollar could see further support, especially against currencies of central banks expected to cut rates more aggressively.

Technical Analysis

Daily US Dollar Index (DXY)

The U.S. Dollar Index is trading nearly flat with the current chart pattern suggesting consolidation, but impending volatility.

The index is currently trapped between the 50-day moving average at 104.869 and the 200-day moving average at 104.365. The longer the market remains inside this range, the greater the breakout value. Be patient and go the way of the move.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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