US Dollar (DXY) Index News: Steady-to-Better with Fed Speculations, Rising Treasury Yields

Dollar Holds Steady

The US Dollar Index (DXY) remained stable on Wednesday as traders bet that the Federal Reserve would delay interest rate cuts until later in the year. This stability precedes key inflation data releases expected later this week. Concurrently, the yen weakened to a four-week low.

At 13:35 GMT, the U.S. Dollar Index is trading 104.853, up 0.240 or +0.23%.

Fed Rate Speculations

The market’s current outlook on the Federal Reserve’s monetary policy reflects skepticism about imminent rate cuts. Recent U.S. consumer confidence data revealed unexpected improvement in May, halting a three-month decline. Despite this, inflation concerns persist, with many households anticipating higher interest rates over the next year. Traders now price in 34 basis points of rate cuts for this year, a stark contrast to the 150 basis points predicted at the start of 2024. September’s potential rate cut remains uncertain as mixed economic signals and persistent inflation influence expectations.

Treasury Yields and Debt Auction Concerns

U.S. Treasury yields climbed for another consecutive day, driven by a weak auction for two-year and five-year notes. The bid-to-cover ratio for the $70 billion five-year note auction fell to 2.3, below the ten-auction average of 2.45, raising concerns about the demand for U.S. government debt. Investors are keenly awaiting the release of the core personal consumption expenditures (PCE) price index on Friday, the Federal Reserve’s preferred measure of inflation, which is anticipated to remain steady on a monthly basis.

Impact on the Yen and Other Currencies

The dollar reached 157.41 yen early on Wednesday, nearing levels that previously prompted intervention from Tokyo. The yen’s decline is attributed to trimmed U.S. easing expectations and rising Treasury yields. Additionally, the yen faces downward pressure from the carry trade, where investors borrow in low-yielding currencies to invest in higher-yielding assets. EUR/JPY and GBP/JPY have both reached significant levels, reflecting the yen’s sustained weakness.

Euro Softens Ahead of Inflation Data

The euro weakened following German regional inflation data showing low month-on-month inflation but higher year-on-year rates. The euro last traded 0.1% lower at $1.0847 and reached its lowest level against the pound in almost two years. Market participants await Germany’s national inflation data and the euro zone’s overall release, though these could be overshadowed by the U.S. PCE inflation data.

Market Forecast

FX markets are expected to remain relatively stable ahead of the core PCE data release later this week. The DXY is likely to hold within the 104-105 range until a significant catalyst emerges from upcoming economic indicators.

Technical Analysis

The DXY is trading steady-to-better inside a pair of intermediate- and long-term trend indicators for an 11th session on Tuesday. This indicates investor indecision and impending volatility.

The 50-day moving average at 105.045 is the next upside target, while the 200-day moving average at 104.411 is the best support. Both moving averages are potential trigger points for breakouts.