US Dollar (DXY): Lower as Traders Brace for Fed’s Impact on Retail Sales

Highlights

• US dollar near 15-month low; investors await retail sales data after mild inflation report.
• Euro reaches 17-month peak; concerns over September rate increase.
• Attention on Fed’s rate hike impact and upcoming retail sales data.

Overview

The US Dollar (DXY) is facing a challenging phase as it hovers near a 15-month low against major currencies. Investors eagerly await new triggers to assess the dollar’s downward potential after last week’s unexpectedly mild US inflation. In response, the U.S. dollar index dropped to 99.587, the lowest level since April 2022, following the revelation of a further easing of US inflation. The smallest annual increase in consumer prices in over two years has alleviated the pressure on the Federal Reserve to continue raising interest rates.

25-Basis-Point Rate Hike Fully-Priced

Looking ahead, money markets have already priced in a 25-basis-point rate hike by the Fed during its upcoming policy meeting. However, market participants anticipate rates to decline as early as December. In the short-term, uncertainty surrounds the dollar’s potential for further movement. While momentum favors the bearish side, signs of it being overextended are emerging.

Euro Challenging 17-Month High

In contrast, the Euro has surged to a fresh 17-month peak against the dollar, reaching $1.1276 during early European trade. Market expectations lean towards a 25 bps hike by the European Central Bank (ECB) in its policy announcement on July 27. Nevertheless, concerns arise regarding a subsequent rate increase in September due to a slowdown in economic activity across the Euro Zone and weak Chinese growth. These factors could prompt market participants to question the euro’s strength, recognizing it as potentially excessive.

The outcome of the Federal Reserve’s upcoming rate hike and its accompanying tone may have a significant impact on the EUR/USD exchange rate. If the Fed adopts a hawkish stance, markets could reassess and push the exchange rate lower.

Shifting focus to other currencies, the British pound has gained 0.3% against the dollar, reaching $1.3115. This level is not far from last week’s peak of $1.3144, which marked the pound’s highest level since April 2022.

Moreover, the Japanese yen has seen a rise of approximately 0.4% to 138.215 per dollar. Investors are eagerly awaiting the Bank of Japan’s monetary policy meeting next week, hoping for indications of a potential shift away from its ultra-dovish stance. Many market participants are pricing in the likelihood of the BOJ widening its yield curve control policy’s trading band by 25 bps in the upcoming meeting.

Retail Sales:  Potential Inflation Indicator

As investors keep a close watch on the market, attention turns to the latest economic data scheduled for the week. In particular, June’s retail sales figures, set to be released on Wednesday, will provide insights into consumer financial health and serve as a potential inflation indicator. Economists surveyed by Dow Jones expect retail sales to have risen by 0.5%, surpassing May’s 0.3% increase.

Technical Analysis

The US Dollar (DXY) is currently facing bearish sentiment as it hovers near a 15-month low against major currencies. With last week’s mild US inflation, investors eagerly await triggers to assess the dollar’s downward potential. The 4-hour price is below both the 200-4H and 50-4H moving averages, indicating a strengthening downtrend. The 14-4H RSI reading of 32.64 suggests weaker momentum.

The US Dollar (DXY) is currently trading within the defined support zone, which indicates a potential level where buying pressure could emerge. However, the price remains well below the main resistance area, suggesting a significant barrier that needs to be surpassed for a bullish reversal. It is important to closely monitor price action and further developments to gauge the market’s future direction accurately.