US Dollar (DXY) Index News: Steady Before Inflation Data as Fed Meeting Begins

Dollar Steady Ahead of U.S. Inflation Data

The U.S. dollar remained close to a one-month high against the euro and reached a one-week peak against the yen as traders anticipate key U.S. inflation data and updated Federal Reserve interest rate projections. Strong domestic jobs data has bolstered the dollar, pushing Treasury yields higher and reducing expectations for rate cuts this year.

At 13:46 GMT, the U.S. Dollar Index is trading 105.389, up 0.286 or +0.27%.

Robust U.S. Jobs Data

The dollar’s recent strength is supported by robust U.S. jobs data, which led to a significant reduction in bets for Fed rate cuts this year. The U.S. dollar index, which tracks the currency against six major peers, stood at 105.16, slightly down from its Monday high of 105.39, the highest since mid-May.

Euro and Yen Movements

The euro remained flat at $1.07635, following a dip to $1.0733, a level last seen in early May. The euro’s decline was partly driven by political uncertainties in Europe, with far-right gains in European Parliament elections prompting French President Emmanuel Macron to call a snap election. Meanwhile, the dollar rose 0.13% to 157.25 yen, its highest level since June 3, as yield differentials with the U.S. kept the yen on the defensive.

Bank of Japan Policy Expectations

Investors are closely watching the Bank of Japan (BOJ), which is set to announce its policy decisions on Friday. Expectations are high for a reduction in the BOJ’s monthly government bond purchases, which could drop by 1 trillion yen to around 5 trillion yen per month. Despite these anticipated changes, the wide yield gap with U.S. Treasuries continues to pressure the yen.

Fed’s Rate Projections

No changes in policy are expected from the Fed at the end of its two-day meeting on Wednesday, but officials will update their economic and interest rate projections. Previously, the median projection was for three quarter-point rate cuts this year. However, officials have adopted a more hawkish stance, and traders now foresee only 37 basis points of cuts by December.

Market Forecast

Given the current economic indicators and Fed projections, the U.S. dollar is likely to maintain its strength in the near term.

If the Fed signals fewer rate cuts and emphasizes economic resilience, the dollar could see further gains, particularly against the yen and euro.

Conversely, any dovish surprises from the Fed could temper the dollar’s ascent. Traders should prepare for potential volatility as markets digest the upcoming inflation data and Fed announcements.

Technical Analysis

The U.S. Dollar Index is gaining strength on Tuesday, aiming to build on its breakout above the 50-day moving average, now set at 105.102, which serves as new support. It is also comfortably above the 200-day moving average at 104.456, the long-term support level.

Prices may continue to rise if inflation exceeds expectations and the Federal Reserve abandons its plans to cut rates this year. This scenario could drive the index towards the mid-April to early-May highs of 106.490 and 106.517.

A drop below the 50-day moving average won’t necessarily reverse the upward trend but could lead to a rangebound market if the 200-day moving average holds as support.